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Futures

What Are Futures?​

Futures are financial contracts obligating the buyer to purchase or the seller to sell an asset at a predetermined price on a specified future date. These contracts are standardised and traded on regulated exchanges, making them accessible and transparent for traders.

Key Features of Futures​

  • Standardisation: Futures contracts specify the quantity, quality, and settlement terms of the underlying asset, ensuring uniformity across trades.
  • Underlying Assets: These can include stocks, indices, commodities, or currencies.
  • Leverage: Futures allow traders to control a large position with a fraction of the contract value as margin.
  • Mark-to-Market (M2M): Profits and losses are settled daily based on the change in the contract's value.

How Futures Work​

When entering a futures contract, the buyer agrees to purchase, and the seller agrees to deliver, the underlying asset at the contract's expiry. Traders can close their positions before expiry or hold them for physical or cash settlement.

Example:
If you buy a Nifty Futures contract at ₹17,500 and the index rises to ₹18,000, you gain ₹500 multiplied by the lot size of the contract.

Why Trade Futures?​

  1. Speculation: Profit from price movements without owning the underlying asset.
  2. Hedging: Protect portfolios from adverse market movements.
  3. Liquidity: High trading volumes ensure ease of entry and exit.
  4. Diversification: Futures offer exposure to multiple asset classes.

Risks of Futures​

  • Leverage Risk: While leverage amplifies profits, it also increases potential losses.
  • Market Volatility: Sudden price swings can lead to significant losses.
  • Margin Requirements: Traders must maintain adequate margins, which may increase near contract expiry.

Applications for AlgoTest Traders​

Using tools like the Strategy Builder and Simulator, AlgoTest traders can create, backtest, and refine strategies involving futures contracts. This ensures they understand potential outcomes and manage risk effectively.

In summary, futures are versatile instruments for speculation and risk management, providing opportunities for traders to profit in both rising and falling markets.