FAQ's>>STOCK FUTURES

What are Stock Futures?
Stock Future is a financial derivative product where the underlying asset is an individual stock. It is also called equity future. This derivative product enables one to buy or sell the underlying Stock on a future date at a price decided by the market forces today. On NSE, unto 19th April, 2005 trading on Stock Futures were allowed on 53 individual stocks approved by SEBI.The stock future list was expanded to include 34 more stocks with effect from April 20, 2005. Another 21 stocks were included in the list on and from May 12, 2005. The latest inclusion was made on May 27, 2005 when 10 more stocks were permitted for future trading. Thus, currently on NSE stock options are allowed on 118 selected stocks.

What is the price quotation for an individual Stock Future?
The price quotation is Rupees along with paisa per share.

How are Stock Futures priced?
The theoretical price of a Future contract is sum of the current spot price and cost of carry. However, the actual price of Futures contract very much depends upon the demand and supply of the underlying stock. Generally, the Futures prices are higher than the spot prices of the underlying stocks. Futures Price = Spot Price + Cost of Carry. Cost of Carry is the interest cost of a similar position in cash market and carried to maturity of the Futures contract less any dividend expected till the expiry of the contract.

How are Stock Futures different from Stock Options?
In Stock options, the option buyer has the right and not the obligation, to buy or sell the underlying share. In case of Stock futures, both the buyer and the seller are obliged to buy or sell the underlying share. Risk return profile is symmetric in case of single stock futures whereas in case of stock options pay off is asymmetric. Also, the price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, volatility of the underlying stock affects the price along with the prices of the underlying stock.

What are the opportunities offered by Stock Futures?
Stock futures offer a variety of usage to the investors. Some of the key usages are mentioned below :

1. Investors can take long-term view on the underlying stock using stock futures.
2. Stock futures offer high leverage. This means that one can take large position with less capital. For example, paying 20% initial margin one can take position for 100%, i.e., 5times the cash outflow.
3. Futures may look overpriced or under priced compared to the spot price and can offer opportunities to arbitrage and Earn risk-less profit. Single-stock futures offer arbitrage opportunity between stock futures and the underlying cash market.
4. When used efficiently, single-stock futures can be an effective risk management tool. For instance, an investor with positioning cash segment can minimize either market risk or price risk of the underlying stock by taking reverse position in an appropriate futures contract.

How are Stock Futures settled?
Up to March 31, 2002, stock futures were settled in cash. The final settlement price is the closing price of the underlying stock. From April 2002, stock futures are settled by delivery, i.e., by merging derivatives positions into, cash segment.

Can an investor square up his position?
The investor can square up his position at any time till the expiry. The investor can first buy and then sell stock futures to square up or can first sell and then buy stock futures to square up his position. For example, a long (buy) position in July ITC futures, can be squared up by selling July ITC futures.

When is it required to pay initial margin to the broker?
The initial margin needs to be paid to the broker on an up-front basis before taking the position.

Do I have to pay mark-to-market margin?
Yes. The outstanding positions in stock futures are market to market daily. The closing price of the respective futures contracts considered for marking to market. The notional loss/profit arising out of mark is paid/received on T+1 basis.

What are the profits and losses in case of a stock futures position?
The profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed.
Let an investor have a long position of one August HPCL Futures@ 330. If the investor squares up his position by selling AugustHPCL futures @ 350, the profit would be Rs. 20 per share. In case, the investor squares up his position by selling August HPCLfutures @ 300, the loss would be Rs. 30 per share.

What is the market lot for stock futures?
The market lot is different for various stock futures contract. It may be noted that the permissible stocks and their market lots change from time to time by virtue of directives from the concerned Stock Exchange and SEBI.

Why is the market lot different for different stocks?
According to L C. Gupta Committee Report on Derivatives, a minimum contract value should be Rs. 2 lakhs. So market lots are so arranged that contract value for one lot becomes Rs. 2 lakh or more. If such calculated contract value is less than Rs. 2 lakh, it is assumed to be Rs. 2 lakh for the purpose of calculating the required amount of margin money.

What are the different contract months available for trading?
At present 1, 2 and 3 months contracts are available for trading.

What is spread trading on BSE and NSE?
One can trade in spread contracts on the Derivative Segment of BSE or NSE. Spreads are the contracts for different price. This means that in case a person wants to buy a July contract and to sell June contract, he can enter an order for Buy June-July stating the difference he wants to pay. Similarly, one can enter an order to Sell June-July stating the difference he wants to receive.

Whether the tradings in Derivatives open before cash market?
Yes. The trading timings for the Derivatives Segment of BSE are from 9:30 a.m. to 3:30 p.m. and that of NSE is from 9:55 a.m. to3:30 p.m. The investors can take advantage of expressing their views in the market before opening of cash market. However, the investors should check the trading timings from time to time.

As an investor, how do I start trading in Stock Futures?
Sign up the client agreement form provided to you by your broker, deposit upfront initial margin and then start trading.

What securities can I submit to the broker as collateral ?
You can pay initial margin in non-cash (bank guarantee, securities etc.) form also. This is an arrangement between you and your broker. However, the mark-to market loss has to the settled in cash.

How does an investor who has the underlying stock use stock futures, when he anticipates a shorttermfall in stock price?
The holder of the physical stock can sell a future to avoid making loss without having to sell the share. Any loss caused by the fall in the price of the stock is offset by gains made on the stock future position.

How can an investor benefit from a predicted rise in the price of a stock ?
An investor can benefit from a predicted rise in the price of a stock by buying futures. As the price of the futures rises, the investor will make a positive return. As the investor will have to pay only the margin (which forms a fraction of the notional value of contract)his return on investment will be higher than on an equivalent purchase of shares. An investor can benefit from a predicted fall in the price of stock by selling futures. As the price of the future falls in line with the underlying stock, the investor will make a positive return.

What is pair trading?
This trading strategy involves taking a position on the relative performance of two stocks. It is achieved by buying futures on the stock expected to perform well and selling futures on the stock anticipated to perform poorly. The overall gain or loss depends on the relative performance of the two stocks. Similarly it is possible to take a position in the relative performance of a stock versus a market index. For example, traders who would like to take only company specific risk could buy/sell the relative index future.