Futures Mechanics: Lot Sizes, Margins & MTM

In the previous modules, we established that a Futures contract is a standardized version of a Forward contract. But how does that "standardization" actually look on your trading screen? To trade futures successfully, you need to understand the gears that make this machine work: Lot Sizes, Expiry, Margins, and the daily MTM.

Unlike stocks, where you can buy just 1 share, Futures require you to trade in wholesale quantities. This is why Derivatives are often called the "Big Boys' Game." Let's break down the mechanics one by one.

1. The Lot Size: Buying in Bulk

An exchange like the NSE doesn't allow you to trade random quantities of a stock. To ensure high liquidity, they group shares into a Lot Size. The value of one lot is typically designed to be around ₹5 Lakhs to ₹10 Lakhs at the time of introduction.

• Nifty 50: Lot size is 50. (1 Lot = 50 units of Nifty).
• Reliance Industries: Lot size is 250.
• HDFC Bank: Lot size is 550.

When you say "I bought Reliance," in the cash market you might mean 1 share. In the Futures market, you mean you controlled 250 shares. This leads us to the concept of Contract Value.

2. Margins: The Entry Ticket

You don't need ₹6 Lakhs to trade 1 lot of Reliance. You only need a fraction of that, called the Margin. In India, the margin is composed of two parts:

A. SPAN Margin

Standard Portfolio Analysis of Risk (SPAN) is the minimum mandatory margin required by the exchange. It is calculated based on the "Worst Case Scenario" of how much the stock could fall in a single day (volatility).

B. Exposure Margin

This is an additional margin charged by the broker to protect against wild swings in the market.
Total Margin = SPAN + Exposure. Usually, this ranges between 15% to 25% of the total contract value.

3. Mark-to-Market (MTM): The Daily Pulse

This is where most beginners get confused. In the cash market, if you buy a stock at ₹100 and it falls to ₹90, you have a "notional loss" of ₹10. You only lose money when you sell. In Futures, you lose money every day the price goes against you.

Every evening at 3:30 PM, the exchange looks at your entry price vs. the closing price. If you are in profit, the money is credited to your bank account by the next morning. If you are in loss, the money is debited. If your account balance falls below a certain level, you get a Margin Call—a demand to add more cash or your position will be forcefully closed.

4. Open Interest (OI): The "X-Factor"

While Volume tells you how many trades happened, Open Interest tells you how many contracts are currently active in the market. It is the most powerful tool to understand where the "Smart Money" is betting.

Example: If the price of Nifty is rising and the Open Interest is also rising, it means new buyers are entering the market with fresh money. This is a Bullish signal. If the price is rising but OI is falling, it means sellers are just running away (Short Covering), which is a Weak rally.

5. Expiry and Rollover

Futures contracts are not for forever. They have a "best before" date called Expiry. In India, equity futures expire on the last Thursday of every month.

• Near Month: The current month's contract (Most liquid).
• Next Month: The following month's contract.
• Far Month: The month after that.

If you want to keep your position alive beyond the last Thursday, you must Rollover. This means you sell your current month's contract and simultaneously buy the next month's contract. This involves a small cost called the Roll Cost.

6. Futures Pricing: Why is it different from Cash?

You will notice that Reliance Cash might be at ₹2,400, but Reliance Future is at ₹2,415. This difference is called the Basis or Spread. The math behind this is the Cost of Carry model:

Futures Price = Cash Price + (Interest Charges - Dividends)

Since you are only paying a 20% margin, the remaining 80% is effectively "loaned" to you by the market. The interest on that 80% is added to the Futures price. When the Future is higher than Cash, it's called Contango (Bullish). When Future is lower than Cash, it's called Backwardation (Bearish).

Summary of Module 03

Futures are highly efficient but dangerous because of leverage. Success in this segment requires more than just predicting direction—it requires Margin Management.

• Always know your Total Exposure (Contract Value), not just the margin paid.
• Watch Open Interest to confirm if a move is real or just a trap.
• Ensure you have enough buffer cash in your account to handle daily MTM swings.

Now that we have mastered the mechanics of the "Obligation" (Futures), it's time to learn about the most popular segment of the market: the "Right" but not the "Obligation." In the next module, we enter the world of Options.