Introductory Context
"A futures contract is a standardised agreement to buy or sell an underlying at a specified price on a specified future date, traded on a regulated exchange with central clearing. Both buyer and seller are obligated to perform. Profits and losses are settled daily through mark-to-market. Initial margin secures the obligation. "
The Three Innovations That Created Modern Futures
1. Standardisation
Forward contracts are fully customisable. Futures have fixed specifications set by the exchange. One Nifty 50 futures contract is always 75 units of the Nifty 50 index, expiring on the last Thursday of the contract month. These fixed terms mean any buyer can transact with any seller — the contract itself is the agreement, not the specific parties. This creates deep, liquid markets where millions of participants trade identical instruments simultaneously.
2. Exchange Trading with Central Clearing
Futures trade on regulated exchanges where every trade is cleared through a central clearing corporation — NSCCL for NSE. When you buy a Nifty futures contract, your counterparty is not the specific person who sold it. Your counterparty is NSCCL. NSCCL is simultaneously buyer to every seller and seller to every buyer. If the person who sold you the contract defaults, NSCCL honours it using its settlement guarantee fund. Counterparty risk disappears entirely.
3. Daily Mark-to-Market Settlement
Unlike forward contracts settling only at maturity, futures positions are marked to market every trading day. At 3:30 PM each day, NSE calculates the closing price of every active futures contract. If your position has made money since yesterday's close, that profit is credited to your account overnight. If it has lost money, that amount is debited. This daily cash flow prevents accumulation of large unrealised losses and ensures margin adequately covers current risk at all times.
Why Daily MTM Matters
MTM settlement means a futures trader's account balance changes every single day they hold a position. A ₹1,50,000 margin deposit for one Nifty futures contract can shrink by ₹11,250 after a single 150-point adverse Nifty move (150 × 75 = ₹11,250 MTM debit). If this brings the account below maintenance margin, the trader must top up or face automatic position closure. This daily accountability prevents the build-up of unmanageable losses.
Futures Pricing — The Cost of Carry Model
Nifty futures do not trade at exactly the same level as Nifty spot. They trade at a premium called the basis, reflecting the cost of financing a position from today until futures expiry.
Futures Fair Value = Spot Price × (1 + Risk-Free Rate × Time to Expiry). If Nifty spot is 24,000, risk-free rate is 6.5%, and expiry is 30 days away: Fair Value = 24,000 × (1 + 0.065 × 30/365) = 24,000 × 1.00534 ≈ 24,128. The futures should trade approximately 128 points above spot. As expiry approaches, this premium narrows to zero — futures and spot converge on expiry day, guaranteed by arbitrage.
Futures vs Options — The Essential Comparison
• futures create obligation on BOTH buyer and seller. Options create obligation only for the SELLER: Obligation.
• futures buyer and seller face unlimited loss in adverse direction. Option buyer's loss is always the premium paid: Maximum loss.
• Nifty futures: ₹1.2–₹1.8 lakh margin per lot. Options buyer: premium only, ₹6,000–₹15,000 for ATM weekly: Capital required.
• futures — yes, daily MTM creates margin calls on adverse moves. Options buyer — no margin calls ever: Margin calls.
• futures — no theta, flat market creates no automatic loss. Options — premium decays daily: Time decay..
Futures and options are complementary instruments. Futures suit delta-1 directional exposure with no time decay. Options suit defined-risk positions, event-driven exposure, and multi-directional strategies. Understanding both tools — and when each is appropriate — is the hallmark of a complete derivatives trader.