Equity index futures are cash settled, which means the underlying asset is not delivered at the end of the contract. If the index price at expiration is higher than the agreed-upon contract price, the buyer has profited, while the sellerthe future writerhas lost money. If the contrary is true, the buyer loses money and the seller makes money.
How are equity futures calculated?
You do not pay the full cash amount upfront or own the underlying asset, unlike other products such as stocks. To enter into an equity futures position, you must first deposit initial margin. Margin is calculated as a percentage of the contract value. You multiply the price of the underlying stock by the contract size to get the notional value of an equity futures contract. The contract size refers to the amount of underlying shares that can be delivered in each contract. Typically, a single contract contains 100 shares of the underlying stock.
If you’re unsure about the contract’s size, underlying, or maturity date, you can look up the contract’s parameters on the exchange’s website. This information is usually readily available there. The product’s Key Information Document contains further information about the product’s qualities and dangers (KID). Furthermore, behind the name of a product on DEGIRO, you may find the risk category of an equity futures contract. The risk category represents the amount of margin that must be deposited.
Equity futures are highly leveraged transactions because just a fraction of the contract’s value must be put up beforehand. This means that even little price changes can have a big impact. An investor will often need to deposit greater margin to enter a future position when the margin requirement is higher. As a result, the leverage is reduced.
The tick size of a futures contract is the smallest price increment that a contract can fluctuate to. This is governed by the contract requirements established by the exchange. Tick value, on the other hand, is equal to the tick size multiplied by the contract size and represents the actual monetary amount won or lost per contract every tick change.
How and when are equity futures settled?
Futures are distinct in that they are settled on a daily basis. The closing market price of a future is decided by the exchange on which it trades at the end of each trading day. This is referred to as the daily mark-to-market (MTM) price, and it is the same for all investors. Daily mark-to-market settlements take place until the contract expires or the position is closed out.
The difference between the close prices of t-1 and t is the daily cash settlement. The contract holder’s account is either deducted or credited depending on the outcome. For example, if the contract’s value rises at the daily settlement, the long position holder’s account will be credited, while the short position holder’s account would be debited.
If the short position holder’s account balance falls below the maintenance margin with DEGIRO, he or she will receive a margin call and will be required to deposit additional cash into the account. DEGIRO will intervene and close positions on the investor’s behalf to cover the shortfall if the investor does not settle the deficit before the deadline specified in the margin call. There are additional expenses in circumstances where DEGIRO is required to intervene.
There is one final daily settlement before an equity future expires, and the position is subsequently booked out of an investor’s portfolio. Depending on the contract, it is either cash or physically settled. The underlying shares are delivered to the receiving party in a physical settlement. The difference between the spot rate of the equity at expiration minus the futures price is used to compute the credit or debit received in cash settlement.
If you want to get out of your position before it matures, you can do so by taking an opposing viewpoint. If you had a long position, for example, you might close it by entering a short one with the same underlying and maturity.
Investing in equity futures with DEGIRO
You can trade futures on a number of associated derivatives markets through DEGIRO. When you log into your account and pick futures from the products menu, you’ll see all of the futures contracts we offer. You may also use the platform’s search box to look for a specific equity futures contract that you want to invest in. Because each equity future has its own ISIN code, that is one approach to look for it.
For futures trading, DEGIRO imposes connection fees, transaction fees, and settlement fees. These fees are listed in our Fee Schedule. You only pay settlement expenses once the contract has expired, not before. It’s likely that the exchange where the stock future is traded levies a commission as well. Our Fee Schedule also lists these charges.
What are the risks and rewards?
Trading on a futures exchange can yield big profits, but it also carries a considerable risk of loss. It is possible to lose more money than was first invested. The maximum profit you can make if you take a long position in an equity future is infinite. This is because the underlying can possibly grow indefinitely. For the same reason, if you are in a short position, your potential losses are limitless. It is recommended that you only take on debts that you can pay off with money you don’t need right now.
This material is not intended to be used as investment advice, and it does not make any recommendations. Investing entails taking risks. Your deposit may be lost (in whole or in part). We recommend that you only invest in financial products that are appropriate for your level of knowledge and experience.
In the stock market, how do futures work?
1. What are Stock Futures and How Do They Work? Stock futures are financial contracts with a particular stock as the underlying asset. A stock future contract is an agreement between the buyer and seller to buy or sell a certain quantity of underlying equity shares at a price agreed upon in the future.
How do equities futures contracts get settled?
There are two types of settlement when trading Equity Index futures: daily and final. Every day, futures markets are marked to market, an advantage that ensures that every market participant sees the same settlement price at the same time.
When an equity future matures, what happens?
Upon expiration, many financial futures contracts, such as the popular E-mini contracts, are cash settled. This means that the contract’s value is marked to market on the last day of trading, and the trader’s account is debited or credited based on whether the trader made a profit or loss. To preserve the same market exposure, large traders typically roll their bets before to expiration. During these rollover periods, some traders may try to profit on pricing abnormalities.
What do you think your future is worth?
Buying vs. selling futures contracts: Which is better? Futures are legally binding contracts that follow a set of rules. In futures, a buyer has a long position and a seller has a short position.
Futures are exchanged through an exchange, sometimes known as a clearing house, in an active market. The National Stock Exchange of India Limited (NSE) participates in futures trading via the futures index in India.
Margin requirement: Margin is the amount that the parties deposit at the clearing house. It serves as a guarantee that both parties will fulfill their obligations when the time comes. At the start of the deal, both sides must deposit a margin. If the initial margin falls below the maintenance amount, the party receives a margin call as a result of the marking to market procedure.
Marking to market is a regular procedure for settling future pricing. Because of active trading, futures prices rise and decrease on a daily basis. Clearing houses have implemented a method of paying the price difference after each trade by debiting and crediting the differential amount from the parties’ margin deposits.
What is an appropriate PE ratio?
Businesses that expand faster than the average, such as technology companies, have higher P/Es. A higher P/E ratio indicates that investors are willing to pay a higher share price today in anticipation of future growth. The S&P 500’s average P/E has historically fluctuated from 13 to 15. A company with a current P/E of 25, which is above the S&P average, trades at 25 times earnings, for example. The high multiple shows that investors expect the company to grow faster than the market as a whole. A high P/E ratio does not always indicate that a stock is overvalued. Any P/E ratio should be compared to the P/E for the industry in which the company operates.
Are futures a high-risk investment?
Futures are no riskier than other types of assets such as stocks, bonds, or currencies in and of themselves. This is because the values of futures, whether they are futures on stocks, bonds, or currencies, are determined by the prices of the underlying assets.
Is it possible to sell futures before they expire?
Purchasing and selling futures contracts is similar to purchasing and selling a number of units of a stock on the open market, but without the need to take immediate delivery.
The level of the index moves up and down in index futures as well, reflecting the movement of a stock price. As a result, you can trade index and stock contracts in the same way that you would trade stocks.
How to buy futures contracts
A trading account is one of the requirements for stock market trading, whether in the derivatives area or not.
Another obvious prerequisite is money. The derivatives market, on the other hand, has a slightly different criteria.
Unless you are a day trader using margin trading, you must pay the total value of the shares purchased while buying in the cash section.
You must pay the exchange or clearing house this money in advance.
‘Margin Money’ is the term for this upfront payment. It aids in the reduction of the exchange’s risk and the preservation of the market’s integrity.
You can buy a futures contract once you have these requirements. Simply make an order with your broker, indicating the contract’s characteristics such as theScrip, expiration month, contract size, and so on. After that, give the margin money to the broker, who will contact the exchange on your behalf.
If you’re a buyer, the exchange will find you a seller, and if you’re a selling, the exchange will find you a buyer.
How to settle futures contracts
You do not give or receive immediate delivery of the assets when you exchange futures contracts. This is referred to as contract settlement. This normally occurs on the contract’s expiration date. Many traders, on the other hand, prefer to settle before the contract expires.
In this situation, the futures contract (buy or sale) is settled at the underlying asset’s closing price on the contract’s expiration date.
For instance, suppose you bought a single futures contract of ABC Ltd. with 200 shares that expires in July. The ABC stake was worth Rs 1,000 at the time. If ABC Ltd. closes at Rs 1,050 in the cash market on the last Thursday of July, your futures contract will be settled at that price. You’ll make a profit of Rs 50 per share (the settlement price of Rs 1,050 minus your cost price of Rs 1,000), for a total profit of Rs 10,000. (Rs 50 x 200 shares). This figure is adjusted to reflect the margins you’ve kept in your account. If you make a profit, it will be added to the margins you’ve set aside. The amount of your loss will be removed from your margins if you make a loss.
A futures contract does not have to be held until its expiration date. Most traders, in practice, exit their contracts before they expire. Any profits or losses you’ve made are offset against the margins you’ve placed up until the day you opt to end your contract. You can either sell your contract or buy an opposing contract that will nullify the arrangement. Once you’ve squared off your position, your profits or losses will be refunded to you or collected from you, once they’ve been adjusted for the margins you’ve deposited.
Cash is used to settle index futures contracts. This can be done before or after the contract’s expiration date.
When closing a futures index contract on expiry, the price at which the contract is settled is the closing value of the index on the expiry date. You benefit if the index closes higher on the expiration date than when you acquired your contracts, and vice versa. Your gain or loss is adjusted against the margin money you’ve already put to arrive at a settlement.
For example, suppose you buy two Nifty futures contracts at 6560 on July 7. This contract will end on the 27th of July, which is the last Thursday of the contract series. If you leave India for a vacation and are unable to sell the future until the day of expiry, the exchange will settle your contract at the Nifty’s closing price on the day of expiry. So, if the Nifty is at 6550 on July 27, you will have lost Rs 1,000 (difference in index levels – 10 x2 lots x 50 unit lot size). Your broker will deduct the money from your margin account and submit it to the stock exchange. The exchange will then send it to the seller, who will profit from it. If the Nifty ends at 6570, though, you will have gained a Rs 1,000 profit. Your account will be updated as a result of this.
If you anticipate the market will rise before the end of your contract period and that you will get a higher price for it at a later date, you can choose to exit your index futures contract before it expires. This type of departure is totally dependent on your market judgment and investment horizons. The exchange will also settle this by comparing the index values at the time you acquired and when you exited the contract. Your margin account will be credited or debited depending on the profit or loss.
What are the payoffs and charges on Futures contracts
Individual individuals and the investing community as a whole benefit from a futures market in a variety of ways.
It does not, however, come for free. Margin payments are the primary source of profit for traders and investors in derivatives trading.
There are various types of margins. These are normally set as a percentage of the entire value of the derivative contracts by the exchange. You can’t purchase or sell in the futures market without margins.
Can we get stock futures delivered?
On Indian exchanges, all stock F&O contracts are mandatory delivery. If you have any stock futures or stock option contracts that are In The Money (ITM) at the time of expiration, you will be obligated to produce the underlying stock2. All out-of-the-money (OTM) stock options expire worthless and with no obligation to deliver. All index futures and options (F&O) contracts are cash-settled.
The table below shows the post-expiry delivery responsibilities for stock F&O contracts.
Taking or giving delivery of the entire contract value in stocks necessitates either full cash or stocks in your account after the contract has expired. As we come closer to expiry, the risk increases, and the margin necessary to keep these contracts rises. Below is our policy on physically settled stock F&O contracts, which explains how margins vary and what we do if we don’t have enough margins or stock.
Futures and Short Option (Calls & Puts) positions.
On the expiry day, the margin requirement for all stock Futures and short options contracts rises to 40% of the contract value, or SPAN + Exposure (whichever is higher).
The increased margin will be reflected in the Kite funds page’s exposure margin field.
For example, if the SPAN + Exposure margin required for ICICI Bank futures is 25%, the contract value on the expiry day will be 40%.
Our margin calculator and order window have been modified to reflect the increased margin needed on the expiry day. Margin calculator can be found here.
Long/Buy option (Calls & Puts) positions.
When you acquire stock options, you pay a tiny premium above the contract value, but when the contract expires, you may be forced to receive or provide delivery of stocks worth the entire contract value. Because the chance of an option buyer defaulting increases dramatically, exchanges begin requesting physical delivery margins four days before the contract expires, with the amount increasing as the contract approaches expiry. As shown in the table below, this margin represents a percentage of the exchange risk margins (VaR+ELM +Adhoc)5. These margins are only applicable to contracts that are in the money (ITM). If an out-of-the-money (OTM) position turns in-the-money (ITM), the delivery margin is also applied. The delivery margin will be reflected on Kite’s funds page.
