Futures Contract
A futures contract is a standardised exchange-traded agreement to buy or sell an underlying at a fixed price on a set expiry date — an obligation for both parties, settled daily through mark-to-market margin.
Quick Answer
A futures contract is a standardised, exchange-traded agreement to buy or sell an underlying at a set price on a fixed expiry, binding both parties. Unlike options, there is no premium and no right to walk away; profit and loss are settled daily by mark-to-market margin. A Nifty future moves almost point-for-point with the index.
Futures Contract — key takeaways
Futures Contract at a glance
| Instrument | Exchange-traded derivative |
|---|---|
| Obligation | Both parties |
| Upfront cost | Margin (no premium) |
| Payoff | Linear / symmetric |
| Daily settlement | Mark-to-market |
| India index futures | Cash-settled |
Futures Contract in simple words
A futures contract locks in a price today for a transaction that settles on a future expiry date. Unlike an option, both sides are obligated: the buyer must buy and the seller must sell at the agreed price, so there is no premium and no 'right to walk away'. Because a future can move against either side without limit, the exchange collects margin upfront and settles profit and loss every day through mark-to-market. On the NSE, Nifty and Bank Nifty futures are the most heavily traded and are cash-settled at expiry.
Futures Contract — detailed explanation
How a futures contract works
A futures contract fixes a price now for delivery or cash settlement at a set expiry. When you buy a Nifty future at 20,000, you profit point-for-point if Nifty rises and lose point-for-point if it falls — a linear payoff with no premium paid. Both parties carry an obligation, which is the key difference from options: an option buyer can let the contract expire, but a futures holder is committed until they close the position or it expires. Contracts are standardised by the exchange in lot size and expiry.
Margin and mark-to-market
Because a futures position has open-ended risk on both sides, the exchange requires margin rather than a premium. You post an initial margin (SPAN plus exposure margin) to open the position, and each day the contract is marked to market: gains are credited and losses are debited to your account against the day's settlement price. If losses erode the margin below the maintenance level, the broker issues a margin call for more funds. This daily settlement is what keeps counterparty risk low on exchange-traded futures.
Futures versus options
A futures contract and an option are both derivatives, but their risk shapes differ. A future has a symmetric, linear payoff and obligates both parties, with no time decay and no premium. An option has an asymmetric payoff: the buyer pays a premium for a right with capped loss, while the seller collects premium and takes on obligation. Traders use futures for straightforward directional or hedging exposure and options when they want defined risk, leverage on volatility, or a non-linear payoff. Neither is 'safer' in the abstract — the risk depends on sizing.
Futures in the Indian market
On the NSE, index futures on Nifty, Bank Nifty and other indices are cash-settled: no shares change hands, and the profit or loss is settled in cash at the final settlement price on expiry. Single-stock futures, by contrast, move to physical settlement — actual delivery of shares — if held to expiry. Index futures trade in the same lot sizes as the corresponding options and expire on the same schedule; the detailed settlement and expiry-day mechanics are covered on ExpiryGyan.
Formula
Contract value = Futures price × Lot size · Daily P&L = (Settlement − Prior settlement) × Lot size
No premium is paid to open a futures position; instead an initial margin (SPAN + exposure) is posted, and profit or loss is credited or debited daily through mark-to-market until the position is closed or expires.
Futures contract vs option (buyer)
| Futures | Option (buyer) | |
|---|---|---|
| Obligation | Both parties obligated | Buyer has a right, not an obligation |
| Upfront cost | Margin (no premium) | Premium paid |
| Payoff shape | Linear, symmetric | Asymmetric, capped loss |
| Maximum loss | Open-ended | Premium paid |
| Time decay | None | Works against the buyer |
Futures Contract — practical example (Nifty)
Illustrative — Nifty, lot size 65
Nifty at 20,000 and you buy one Nifty future for the monthly expiry at 20,000, with a lot size of 65. No premium is paid, but you post margin — say roughly ₹1.5 lakh (illustrative; the exact SPAN-plus-exposure margin is set by the exchange). If Nifty rises to 20,300, your position is marked to market and you gain (20,300 − 20,000) × 65 = ₹19,500. If instead Nifty falls to 19,700, you lose ₹19,500, debited daily. Unlike a long option, that loss is not capped at a premium — it grows with the move.
Why Futures Contract matters in practice
- A futures contract obligates both buyer and seller — there is no premium and no right to walk away.
- Futures have a linear, symmetric payoff: profit and loss move point-for-point with the underlying.
- Positions require margin and are settled daily by mark-to-market, which can trigger margin calls.
- NSE index futures (Nifty, Bank Nifty) are cash-settled; single-stock futures settle physically at expiry.
Common misconceptions about Futures Contract
- Misconception: Futures are safer than options because there is no premium to lose.
Reality: A futures contract has a linear, symmetric payoff with open-ended risk on both sides and is settled daily by mark-to-market, so losses are not capped at any premium. Paying no premium removes the cost, not the risk — position sizing matters more with futures than with bought options.
Common mistakes with Futures Contract
- Treating a future as 'safer than options' because there is no premium, while ignoring its open-ended, symmetric risk.
- Under-funding the account and being forced to close a position on a mark-to-market margin call at a bad price.
- Confusing the margin posted with the maximum loss — futures losses are not capped by the margin amount.
- Holding a single-stock future to expiry without the funds or intent for physical delivery.
How professionals use Futures Contract
Professionals use futures when they want clean, linear exposure without the time decay and volatility sensitivity of options — for directional trades, calendar and inter-market spreads, and hedging a cash or options book. They size positions by the rupee move the contract can produce, not by the margin required, and they keep a buffer above the initial margin so a routine mark-to-market swing never forces liquidation. Where they want defined risk or a volatility view, they switch to options instead.
Futures Contract — frequently asked questions
What is a futures contract?
A futures contract is a standardised, exchange-traded agreement to buy or sell an underlying at a fixed price on a set expiry date. Both the buyer and the seller are obligated to honour it, so no premium is paid; instead the exchange collects margin and settles profit and loss daily through mark-to-market.
How is a futures contract different from an option?
A future obligates both parties and has a linear payoff with open-ended risk on both sides, and no premium. An option gives the buyer a right, not an obligation, for a premium, with loss capped at that premium. Futures suit directional exposure; options suit defined-risk or volatility-based trades.
What is mark-to-market in futures?
Mark-to-market is the daily settlement of a futures position against the day's settlement price. Gains are credited and losses debited to your account each day, so profit and loss accrue continuously rather than only at expiry. If losses erode your margin below the maintenance level, a margin call follows.
Do I pay a premium for a futures contract?
No. Unlike an option buyer, a futures trader pays no premium. Instead you post margin — an initial SPAN plus exposure margin set by the exchange — to open the position, and your profit or loss is settled daily. The margin is a performance deposit, not the cost or the maximum loss of the trade.
How much can I lose on a futures contract?
Potentially far more than the margin posted, because a futures payoff is linear and symmetric with no cap. A long future loses as the underlying falls and a short future loses as it rises, point-for-point by lot size. This open-ended risk is why disciplined position sizing matters more with futures than with bought options.
Are Nifty futures cash-settled in India?
Yes. NSE index futures such as Nifty and Bank Nifty are cash-settled: no shares are delivered, and the profit or loss is settled in cash at the final settlement price on expiry. Single-stock futures instead move to physical settlement, delivering the actual shares if held to expiry.
What is the lot size of a futures contract?
A futures contract trades in a fixed lot size set by the exchange — the same lot as the corresponding options on that underlying. The contract value is the futures price multiplied by the lot size, and all profit, loss and margin scale with it. Lot sizes are revised periodically by the NSE.
Sources & references
Published 17 July 2026. Educational content only — not investment advice.