How Can We Get Out of a Futures Contract?

Chapter 2.4: How to Purchase and Sell Futures Contracts

Ownership and selling futures contract is substantially the same as buying or selling a number of units of a stock from the greenbacks market, but without taking immediate delivery.

In the case of alphabetize futures as well, the index'southward level moves up or down, replicating the motility of a stock cost. So, you can actually merchandise in alphabetize and stock contracts in just the same way as you would trade in shares.

Markets face volatility. VIX futurity by the NSE assistance you quantify the volatility. Click hither to know more about VIX.

In this section, nosotros wait at how to buy and sell futures contracts:

How to purchase futures contracts

One of the prerequisites of stock market trading – be it in the derivative segment – is a trading business relationship.

Money is the obvious other requirement. However, this requirement is slightly different for the derivatives market.

When you buy in the cash segment, you have to pay the entire value of the shares purchased – this is unless y'all are a 24-hour interval trader utilizing margin trading. You have to pay this corporeality upfront to the exchange or the clearing firm.

This upfront payment is chosen 'Margin Money'. It helps reduce the risk that the exchange undertakes and helps in maintaining the integrity of the market.

Once you lot have these requisites, you can purchase a futures contract. Only place an order with your banker, specifying the details of the contract like the Scrip , expiry month, contract size, and and then on. Once you do this, hand over the margin money to the broker, who volition then get in touch with the commutation.

The substitution will find y'all a seller (if yous are a buyer) or a buyer (if you are seller) .

Click here to read about margin calls

How to settle futures contracts

When you trade in futures contracts, you do non requite or take immediate delivery of the assets concerned. This is called settling of the contract. This usually happens on the appointment of the contract's expiry. However, many traders also choose to settle before the death of the contract.

Click here to know more most derivatives death

For stock futures, contracts can be settled in two ways:

On Expiry

In this case, the futures contract (purchase or sale) is settled at the endmost price of the underlying asset as on the decease date of the contract.

Example: You have purchased a unmarried futures contract of ABC Ltd., consisting of 200 shares and expiring in the month of July. At that time, the ABC share's toll was Rs 1,000. If on the terminal Th of July, ABC Ltd. closes at a price of Rs 1,050 in the greenbacks marketplace, your futures position volition be settled at that price. You will receive a profit of Rs 50 per share (the settlement price of Rs one,050 less your cost cost of Rs 1,000), which adds up to a neat little sum of Rs 10,000 (Rs 50 10 200 shares). This amount is adjusted with the margins you have maintained in your account. If you receive profits, they will exist added to the margins that you lot accept deposited. If you fabricated a loss, the amount will be deducted from the margins.

Kotak Securities offer Value Added Features like the Automobile Invest. Click here to know more.

Before Expiry

It is not necessary to hold on to a futures contract till its expiry date. In exercise, almost traders exit their contracts before their expiry dates. Whatsoever gains or losses you've fabricated are settled past adjusting them confronting the margins yous have deposited till the date you make up one's mind to exit your contract. Y'all can do then past either selling your contract, or purchasing an opposing contract that nullifies the agreement. Here again, your profits volition be returned to you or losses will be nerveless from yous, afterwards adjusting them for the margins that you lot accept deposited once yous square off your position.

Alphabetize futures contracts are settled in cash. This tin can again be done on death of the contract or before the expiry appointment.

• On Expiry

  When closing a futures alphabetize contract on death, the closing value of the index on the expiry date is the price at which the contract is settled. If on the date of death, the index closes college than when you bought your contracts, you make a profit and vice versa. The settlement is made past adjusting your proceeds or loss against the margin money y'all've already deposited.

  

  Example: Suppose yous purchase two contracts of Nifty future at 6560, say on July 7. This particular contract expires on July 27, being the last Thursday of the contract serial. If y'all accept left India for a holiday and are not in a position to sell the future till the day of expiry, the exchange will settle your contract at the closing price of the Groovy prevailing on the death twenty-four hour period. And then, if on July 27, the Nifty stands at 6550, yous will accept made a loss of Rs 1,000 (difference in index levels – x x2 lots x lot size of 50 units). Your broker will deduct the corporeality from your margins deposited with him and forward it to the stock commutation. The exchange, in plow, will forrard it to the seller, who has made that profit. However if Smashing closes at 6570, you would take made a profit of Rs 1,000. This will exist added to your account.

• Before Expiry

  You can choose to exit your index futures contract before the date of expiry if you believe that the market will rise before the expiry of your contract period and that you lot'll get a better price for information technology on an earlier engagement. Such an exit depends solely on your judgment of market movements as well as your investment horizons. This volition besides be settled by the substitution by comparison the index levels when you lot bought and when you leave the contract. Depending on the profit or loss, your margin account will be credited or debited.

  Brush-upwards your investment knowledge past reading the investment basics. Click here

What are the payoffs and charges on Futures contracts

A futures market helps private investors and the investing community as a whole in numerous means.

However, it does not come up for gratuitous. The primary payoff for traders and investors in derivatives trading is margin payments.

There are different kinds of margins. These are usually prescribed by the exchange as a percentage of the total value of the derivative contracts. Without margins, you cannot buy or sell in the futures marketplace.

Click hither to read nearly the market indicators yous must know

Here'due south a look at the four different margins in detail:

Initial Margin:

Initial margin is defined as a per centum of your open position and is ready for unlike positions by the commutation or clearing business firm. The factors that make up one's mind the amount of initial margin are the average volatility of the stock in business organization over a specified period of time and the involvement cost. Initial margin amounts fluctuate daily depending on the market value of your open positions.

Exposure Margin:

The exposure margin is set by the exchange to control volatility and excessive speculation in the futures markets. Information technology is levied on the value of the contract that yous buy or sell.

Mark-to-Market Margin:

Mark-to-Market margin covers the difference between the cost of the contract and its endmost toll on the mean solar day the contract is purchased. Mail service purchase, MTM margin covers the daily differences in closing prices.

Click here to read nigh Maruti Suzuki shares plunge afterwards mark-to-market losses on the cash surplus.

Premium Margin:

This is the amount yous give to the seller for writing contracts. It is also unremarkably mentioned in per-share footing. As a buyer, your pay a premium margin, while you receive one as a seller.

Margin payments assist traders get an opportunity to participate in the futures marketplace and make profits past paying a small sum of money, instead of the total value of their contracts.

Still, there are besides downsides to futures trading. Trading in futures is slightly more than complex than trading in straightforward stocks or etfs. Not all futures traders are well-versed in the nitty-gritties of the derivatives business organization, leading to unforeseen losses. The low upfront payments and highly leveraged nature of futures trading tin can tempt traders to be reckless which could lead to losses.

Read near investment lessons from the football field hither

WHAT Adjacent?

Congrats, now y'all know almost Futures trading. Permit'southward motion on to Options – what are options? What are the types of options and how to trade them? Click hither to know more than.

• Mobile Trading with Kotak Stock Trader View Demo
• Desktop Trading with KEAT ProX View Demo

2014731144017362903433

Register for our Newsletter Meaningful Minutes

• Snapshot of profit/loss
• Reflects performance of your portfolio
• Helps compute taxes

denkerobold1960.blogspot.com

Source: https://www.kotaksecurities.com/ksweb/Research/Investment-Knowledge-Bank/how-to-buy-and-sell-futures-contracts

Share this post