Stock Futures Made Simple: Margin, Expiry, Hedging Explained

CA Manish Singh: 
Hi everyone. 

In the last video we discussed Open Interest and how changes in Open Interest, whether additions or reductions, help us judge where price may possibly move. 
Now we will talk about the place where Open Interest and Futures are used the most. 
That place is stocks. 

In index trading you have many options strategies available. 
Most traders prefer trading with Options in indices and not with Futures. 
But in stocks, a large number of traders participate through stock futures, because many of them are actual hedgers. 

Why Stock Futures Are Popular 

CA Manish Singh: 
Actual hedgers hold stocks in good quantity. To hedge their downside risk, they take positions in stock Futures. 

So stock Futures are used for two reasons: 

1. Speculation 
   If I feel the price of a stock may go up, I may go long in the stock Future. 
   If I feel the price may fall, I can go short in the Future without actually owning the stock.
2. Hedging 
   Most institutions hold stocks in large quantities. For example, a mutual fund may have significant exposure to Reliance. 
   If Reliance falls 2 percent, the performance of that fund for that quarter may get affected. 
   To hedge that risk, the fund may take a short position in Reliance Futures. 
   So if Reliance falls 2 percent, at least a part of this, say 1 percent, may be recovered through the Futures short position. 

Many institutions follow this approach. 
That is why stock Futures are commonly used. 

Why Futures Margin Makes Trading Accessible 

CA Manish Singh: 
As I explained earlier, if you want to buy 500 quantity of Reliance in the cash market, you would end up paying around 7.5 lakh rupees. 

But if you want to simply trade 500 quantity of Reliance in Futures, you will pay only around 1.25 lakh or 1.35 lakh rupees. That amount is the margin required. 

Let me show this to you. 

If we open the trading window and select Reliance in the cash segment, and if I want to buy 500 quantity, the margin required is 7,65,000 rupees. 

But if I choose Reliance Futures and buy one lot, which is also 500 quantity, the margin required is 1,40,000 rupees. 

So instead of 7,65,000, I only need 1,35,000 or 1,40,000. 

Margin required means: 
To trade this one contract, I must pay a percentage of the contract value. 
Whatever profit or loss happens at the end of the day will be adjusted through mark to market. 
If it is a loss, I must pay additional amount to the broker so the position can continue. 

Expiry and Contract Cycles 

CA Manish Singh: 
If you look at the Futures symbol, you will see something like Reliance July 2025. 

This means the contract is valid for the month of July. 

In India, we have two exchanges: NSE and BSE. 

All contracts on NSE currently expire on the last Thursday of the month. 
NSE has announced a change, and soon all monthly contracts will expire on the last Tuesday of the month. 

BSE also has stock Futures, but they are not liquid. 
So most traders use NSE Futures, which is why I am explaining NSE contracts. 

So Reliance July means it will expire at the end of July. 

Now if we check the quote for Reliance July Futures, you will see: 

• Open
• Close
• High
• Low
• Open Interest of almost 7 crore contracts 

You will also see buy and sell interest. 

Below that, you will see that Reliance Futures has three months of contracts open: 

• 31st July
• 28th August
• 30th September 

This means the next three monthly contracts are always available. 

Based on how long you want to hold your position, you choose the expiry. 

Usually, on the expiry day of the current month, the next month’s contract opens. 
So at any time, three months of contracts are open in NSE. 

Let us also check the Open Interest: 

• July contract: 7 crore quantity
• August contract: 2.75 crore quantity 

This means traders have interest in both July and August contracts, although most liquidity remains in the near-month contract. 

(And as always, anything shown here is only for educational purposes, not a recommendation.) 

Risk Management in Futures 

CA Manish Singh: 
Let us now come to risk management. 

Suppose I decide to take a position in Reliance July Futures. 

I may be correct or I may be incorrect. 

Say I expect the price to rise. 
The current price is 1531 and I feel it may go to 1600 by the end of the month. 

If it goes from 1531 to 1600: 

• The rise is 69 points
• Lot size is 500
• 69 × 500 = about 34,500 rupees 

After charges, the profit may be slightly less. 

But while I am expecting this, someone else is selling the Future. 
What if their analysis is correct and mine is wrong? 

That is where stop-loss becomes crucial. 

Most traders follow risk–reward ratios such as 1:2 or 1:3. 

Example of 1:2 

If I aim to gain 34,000, I must be willing to lose 17,000. 

17,000 ÷ 500 = 34 points. 
So my stop-loss would be around 1497. 

Example of 1:3 

34,000 ÷ 3 = around 11,333, roughly 22 points. 

So SL would be: 
1531 minus 22 = about 1509. 

Risk management depends on what ratio I choose. 

If you look at the chart, you will notice a Marubozu candle. 
The bottom of that candle is around 1497, which aligns with our earlier stop-loss. 
So placing an SL near the low of that Marubozu candle makes sense. 

If I am ready to risk 34 points, I must chase at least double, meaning 70 points, to maintain a 1:2 ratio. 

This is how risk management works. 

Using Options for Risk Management 

CA Manish Singh: 
There are additional tools for risk management. 

If I have bought Reliance Futures at 1531, and I feel this is a short-term trade of one or two days, I can also buy a put option as protection. 

For example: 

If Reliance falls from 1531 to 1520: 

• That is an 11 point fall
• A put option priced at 27 may rise to 32
• That is a 5 point rise in the option
• So instead of losing the full 11 points on the Future, my net loss reduces to about 5 points 

This allows me to hold the position longer if I believe it is only a temporary dip. 

If the market later bounces and moves towards my target, I benefit. 

If I carry an overnight position, it is usually safer to hold a put option as protection because we never know what may happen the next day. 

There are many option strategies based on stock holdings. 
We will discuss these in detail in later chapters. 

For now, remember: 
Futures risk can be managed either by using a stop-loss or by using a counter-position with Options. 

CA Manish Singh: 
Since we briefly touched on Options in this chapter, in the next chapter we will begin studying Options in detail. 

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