Futures Trading Basics: How Equity Futures Work in India

What is a futures contract?

A futures contract is a legally binding agreement between two parties to transact a specified quantity of an underlying asset at a predetermined price on a specific future date. The critical word is obligation: unlike an option, a futures contract imposes a duty on both the buyer and the seller to honour the deal at expiry (or to square off the position before that date).

In the context of Indian equity markets, the underlying asset is either an individual stock or a stock index (most commonly the Nifty 50 or Bank Nifty). All equity futures in India are traded on the National Stock Exchange (NSE)under the F&O segment. The exchange, through its clearing arm NSE Clearing Limited, acts as the central counterparty to every trade — meaning you never face the credit risk of the person on the other side of your trade.

Futures contracts serve three broad economic purposes. Hedgers — typically institutional investors or large portfolio holders — have historically used futures to reduce the price risk on an existing equity position. Arbitrageurs exploit price differences between the spot market and the futures market (or between different expiry months) to earn a near-riskless return. Speculators take directional positions using the leverage that futures provide. All three roles are present in the market simultaneously, and their interaction determines price discovery.

How NSE equity futures are structured

Every NSE futures contract has four defining characteristics:

• Underlying.Either a specific stock from the approved F&O list (NSE publishes this list) or an index such as Nifty 50, Bank Nifty, Nifty Midcap Select, or Nifty Financial Services.
• Lot size. Futures are not traded in units of one share. Each contract covers a fixed number of shares called the lot size. For Nifty 50 futures, the lot size has historically been 25 units of the index. For individual stocks, lot sizes have ranged from a few hundred to a few thousand shares, depending on the stock's price, so that the notional value of one contract stays within a broadly comparable range. SEBI and NSE review lot sizes periodically and revise them when a stock's price movement pushes the contract value significantly above or below the intended range.
• Expiry. NSE equity futures have historically offered three concurrent monthly expiry contracts: the near month (current month), the mid month (next calendar month), and the far month (two months out). Monthly contracts expire on the last Thursday of the contract month (or the preceding trading day if Thursday is a market holiday). At any given time, three series are live simultaneously; when the near-month contract expires, a new far-month series is introduced.
• Settlement price. On expiry day, the final settlement price for index futures is the volume-weighted average price (VWAP) of the index in the last 30 minutes of trading. For stock futures, physical settlement applies (see below).

Mark-to-market: daily settlement of gains and losses

One of the most important mechanics to understand about futures is mark-to-market (MTM) settlement. Unlike buying a stock outright — where your unrealised profit or loss only matters when you eventually sell — futures positions are settled in cash at the end of every single trading day.

Here is how it works. At the end of each trading session, NSE Clearing determines a daily settlement price for each contract (based on the closing price or a volume-weighted average near the close). Your open position is then "marked" to this price. If the settlement price moved in your favour, the profit is credited to your trading account that evening. If it moved against you, the loss is debited. The next day, your position is treated as if you had entered at yesterday's settlement price, and the process repeats.

The practical consequence is that a sufficiently large adverse move over a single day can result in a margin shortfall — your broker will notify you of a margin call, requiring you to deposit additional funds before the next trading session, or your position may be partially or fully squared off. This daily cash flow dynamic is fundamentally different from holding a stock, where you can simply "wait for it to come back" without an immediate cash demand.

Initial margin, maintenance margin, and the SPAN model

To open a futures position, you must deposit initial margin with your broker, who passes it to the clearing corporation. This is not a down payment — it is a performance bond that sits in your account (or pledged securities) to cover potential losses. The initial margin is calculated using the SPAN (Standard Portfolio Analysis of Risk) model, developed originally by the Chicago Mercantile Exchange and adapted by NSE Clearing.

SPAN works by computing the theoretical profit or loss on a portfolio under a grid of hypothetical scenarios — various combinations of price moves and volatility shifts in the underlying. The worst-case loss across this scenario grid becomes the SPAN margin requirement. The model is re-run at least once daily (and more frequently during high-volatility periods), so your margin requirement is not static — it changes as the market environment changes.

On top of SPAN, NSE Clearing also levies an exposure margin(sometimes called an additional margin). This is a fixed percentage of the contract's notional value — historically around 3% for index futures and higher for individual stocks — that acts as a secondary buffer for extreme moves not fully captured by the SPAN scenarios. The total initial margin you see quoted by brokers is typically SPAN + exposure margin.

A maintenance marginthreshold may also exist: if your account balance falls below this level due to MTM losses, a margin call is triggered. Different brokers handle this differently — some require you to top up to the initial margin level; others require only the maintenance margin threshold to be restored. Reading your broker's margin policy carefully is important before entering any futures position.

Basis and cost of carry

The basis is defined as the futures price minus the spot price of the underlying. In a normal (contango) market, futures trade above the spot price because they embed the cost of carry — essentially the risk-free interest rate that a notional investor would forgo by holding the underlying physically rather than holding a futures contract plus cash. For Indian equity futures, the basis is approximately:

Basis ≈ Spot × Risk-free rate × (Days to expiry / 365) – Expected dividends before expiry

As expiry approaches, the basis converges toward zero because the time to carry approaches zero. On expiry day, futures and spot prices must converge (otherwise a riskless arbitrage would exist). This convergence is sometimes called basis decay, and it has historically been a more predictable feature of futures pricing than the underlying price direction itself.

When expected dividends in a stock are large relative to the carry cost, the futures can trade below spot — a condition called backwardation. This has historically been observed in high-dividend-yield stocks approaching their ex-dividend date.

Rolling over a position

If you hold a near-month futures position and wish to maintain exposure beyond expiry, you need to roll over the position: close the near-month contract and simultaneously open an equivalent position in the next-month contract. The net cost of this operation is the roll spread — the difference between the near-month and next-month prices at the time you transact.

NSE publishes rollover statistics near each expiry, showing what percentage of open interest in a contract has already moved from the near month to the next month. Observed historically, rollover activity tends to pick up in the final week before expiry, often causing the near-month contract to become less liquid relative to the mid-month. Institutional participants have historically tended to roll positions earlier than retail participants, though this is a broad pattern and not a mechanical rule.

Physical settlement: the October 2019 change

Prior to October 2019, all Indian stock futures were cash-settled at expiry — meaning only the profit or loss (the difference between entry price and final settlement price) changed hands, not actual shares. SEBI changed this in a phased manner, and by October 2019 all stock futures contracts (and stock options) moved to physical settlement.

Under physical settlement, a futures contract held open to expiry results in the actual delivery of shares. If you were long (had agreed to buy), you receive shares in your demat account and pay the full contract value. If you were short (had agreed to sell), you must deliver shares from your demat account and receive payment. This has significant practical implications:

• Higher margin in the last week. SEBI mandated elevated physical delivery margins in the final four trading days before expiry (see our F&O margin calculator for illustrative figures). These have historically been set at 10– 50% of contract value depending on the stock, on top of normal SPAN + exposure margin, making it expensive to carry stock futures into expiry week without intending delivery.
• Delivery obligation risk. A short futures position held to expiry with insufficient shares in demat can result in auction penalties. Brokers have historically squared off positions automatically before expiry to avoid this for retail clients.
• Index futures remain cash-settled. Nifty 50, Bank Nifty, and other index derivatives are not physically settleable (you cannot deliver an index), so they continue to be cash-settled at the final settlement price.

Leverage and the risk of amplified losses

The defining risk of futures is leverage. Because you deposit only a margin (typically 8–20% of notional value), your capital controls a much larger notional exposure. A 10% adverse move in the underlying — not an unusual event over even a few weeks in volatile markets — can wipe out a margin deposit entirely, and in some scenarios result in losses exceeding the original deposit.

Historical data from Indian equity markets shows that single-day moves of 3–5% have occurred in large-cap stocks during earnings announcements, macro events, and sectoral shocks. For a leveraged futures position, such moves have historically been sufficient to trigger margin calls or position closeouts. Leverage amplifies both favourable and adverse outcomes proportionally — there is no asymmetry in futures that would protect the holder from the downside.

This article does not advocate taking any particular position in futures. The educational observation is simply that the risk profile of futures is categorically different from owning a stock outright, and any participant should understand this distinction clearly before placing an order.

Who participates in the futures market

The NSE F&O segment has historically seen participation from four broad categories:

• Hedgers. Institutions and large portfolios that own the underlying stocks and use short futures positions to reduce their exposure to adverse price moves. A mutual fund with a large Nifty 50 portfolio, for example, has historically used index futures as a short-term hedge during periods of anticipated volatility — budget day, election results, global macro events.
• Arbitrageurs. Participants who exploit the basis between spot and futures prices by simultaneously buying in the cheaper market and selling in the more expensive one. Cash-futures arbitrage (buying spot, shorting futures when futures trade at a premium) has historically been a significant activity in the Indian market and tends to keep the basis close to theoretical carry costs.
• Proprietary traders and institutions. Banks, brokerage desks, and proprietary trading firms use futures for directional views, spread trades, and portfolio management. They tend to be the most active contributors to daily volume and open interest.
• Retail participants.Individual traders who use futures for directional exposure. Regulatory data has historically shown that a large majority of individual retail F&O participants realised net losses over multi-year periods. SEBI has published studies on this topic, and the data is worth reading carefully before participating.

Related tools and further reading

To explore the margin requirements for any specific stock or index futures contract, use our F&O margin calculator. For a deeper understanding of options — which give the buyer the right but not the obligation to transact — see our companion article Options Trading Basics. For a full explanation of the margin framework including peak margin rules, see F&O Margin Requirements Explained.

This article is educational only and does not constitute investment advice or a solicitation to trade derivatives. Futures trading involves substantial risk of loss, including the potential to lose more than the initial margin deposited. Past market behaviour is not indicative of future results. Please consult a SEBI-registered investment adviser before making any trading decision.