Futures Trading Explained: Big Returns or Big Risk?

CA Manish Singh: Hello everyone, and welcome to Chapter 16. 
In the last chapter, we discussed what Futures Contracts are and how they operate in the Indian market. 
In this chapter, we will understand how trading in futures amplifies both profits and losses, and why leverage can be both beneficial and risky. 

Understanding Amplification in Futures Trading 

When you trade in futures, your profits and losses are magnified because you are controlling a much larger contract value with a smaller margin. 

For example, if a contract value is ₹17 lakh, and you are able to take a position with a margin of ₹2.17 lakh, the movement in the underlying price has a multiplied impact on your returns. 

This amplification works in both directions. 
If the market moves in your favour, you gain more. 
If it moves against you, you lose more. 

This is why futures are considered a double-edged sword. You gain more, but you may also lose more, and losses can dent your capital very quickly. Trading always involves significant risk, and understanding these concepts is essential for becoming a disciplined trader. 

Live Example: Nifty Futures 

Let us move to the screen. 

We are looking at Nifty July Future in the option strategy builder. 
Although we will discuss option strategies later, for now we will use this to illustrate futures payoff. 

After selecting Nifty and clicking Futures, you can see three available contracts: 

• 31st July
• 28th August
• 25th September 

If we select the 31st July contract and choose Buy, the margin required is ₹2.17 lakh for one lot. 

If you increase the number of lots, the margin requirement increases accordingly. 
For this example, we will continue with one lot. 

You can also see that with about ₹2 lakh margin, both profits and losses appear unlimited on the chart. In reality, extreme scenarios are rare, but technically the risk is open-ended. 

Understanding Payoff Movement 

Current Nifty level: 25,358 to 25,360. 

If you are bullish and buy one lot: 

If Nifty goes up by 50 points (to 25,400): 

Your projected profit is ₹2,658. 

If Nifty goes down by 50 points (to around 25,300): 

You lose approximately ₹4,800, because the fall from the reference point is around 60 points. 

The payoff is simple: 

• Profitable movement: Points gained × 75
• Loss movement: Points lost × 75 

If Nifty rises by 100 points: 

Your profit becomes ₹6,400. 

On a margin of around ₹2,70,000, this is close to a 3 percent return. 

But remember, these returns do not include trading charges. 
You may pay ₹500 to ₹600 in charges. 
So your net profit may be closer to ₹5,500. 

The Reality of Day-to-Day Trading 

Most traders do not consistently capture 100 points. 
On an average trading day, traders typically capture 40 to 50 points. 

On losing days, you may lose: 

• ₹4,000 to ₹5,000 plus charges 

Charges reduce profits and increase losses, which means your capital faces more pressure on losing days. 

At the end of the month: 

• If you are profitable overall, you are becoming a good trader.
• If you are at a loss, you still have learning to do, and you should revisit the concepts in previous chapters. 

Why Traders Prefer Futures 

Despite being risky, traders continue to use futures because: 

1. Lower capital requirement 

You take large exposure with relatively small margin. 

2. Ability to short sell 

In the cash segment, you cannot short stocks you do not hold. 
In futures, you can short without owning the stock. 

3. Hedging your holdings 

If you have stock holdings and short futures: 

• If price goes down: You gain in your short futures position.
• If price goes up: Your stock value increases. 

So the gains offset the losses, protecting your portfolio. 

4. Using pledging for leverage 

If you hold good stocks, you can pledge them and use the margin benefit to trade multiple contracts. 
This avoids selling your long-term holdings and still allows active trading. 

We will explain pledging in detail in upcoming chapters. 

Conclusion 

Futures trading amplifies both profits and losses. 
If you develop strong chart-reading skills, use stop-losses consistently and maintain discipline, futures can help you improve your returns. 
However, lack of discipline can lead to rapid capital erosion. 

Disclaimer: Investments in securities markets are subject to market risks. Read all related documents carefully before investing.