How Futures Contracts Work: A Beginner’s Guide
A futures contract is an exchange-traded obligation whose profit or loss changes point-for-point with its traded price. This chapter explains what happens after you select a futures contract: how its price relates to the underlying market, how an order becomes an open position, how profit and loss is calculated and settled, and what happens when you close, roll or hold the contract to expiry.
Key Takeaways
- Futures contracts work through standardised terms such as the underlying asset, lot size, expiry, tick size and settlement method.
- A futures trade creates a long position when the contract is bought and a short position when it is sold.
- Futures P&L equals the price change multiplied by the lot size and number of lots, adjusted for trade direction.
- Futures positions are marked to market, meaning gains and losses are calculated and settled daily while the position remains open.
- A futures position closes through an opposite trade in the same contract or through final settlement at expiry.
The Futures Contract Lifecycle
A futures trade is not complete when your order executes. It moves through a lifecycle of contract selection, trade matching, margin blocking, daily settlement and either an offsetting exit or final settlement at expiry.
Assume you want exposure to the Nifty 50 through a Nifty future. The process works in five stages:
Select the exact contract. You choose the NIFTY underlying and one available monthly expiry. A July future and an August future are separate contracts even though both track the Nifty 50.
Enter on one side. A buy creates a long position; a sell creates a short position. The order must match an order on the other side of the exchange order book.
The clearing framework takes over. The clearing corporation calculates obligations, collects margins through members and stands between the buyer and seller. You do not need to identify or later trade with the same person.
The position is marked to market. Profit or loss is calculated using the official daily settlement process while the contract remains open.
The position ends. You either place an equal and opposite trade in the same contract or allow the open contract to reach final settlement on expiry.
Analogy: Think of each expiry as a separate railway ticket. A July ticket and an August ticket may cover the same route, but cancelling one does not cancel the other. In the same way, selling an August future does not close a July long future.
The Nifty Futures Contract You Are Trading
The exchange standardises the contract. You choose the direction, expiry, number of lots, order type and price, but you do not negotiate the lot size, tick size or settlement method with the other trader.
Contract months and expiry
Nifty 50 futures have three consecutive monthly contracts:
Near month: the closest monthly expiry.
Next month: the following monthly expiry.
Far month: the third monthly expiry.
Nifty futures expire on the last Tuesday of the expiry month. If that Tuesday is a trading holiday, the contract expires on the previous trading day. A new far-month contract is introduced after the near-month contract expires.
Nifty options may have weekly expiries, but Nifty futures have only the three monthly contracts described above.
Current lot size and contract value
Module 1 explains what a lot size means. For the calculations in this chapter, the verified Nifty 50 market lot as of 24 July 2026 is 65 units.
At an illustrative futures price of 25,200:
Contract value = Futures price x Lot size
25,200 x 65 = ₹16,38,000
This is the notional value represented by one lot. It is also the base quantity used to calculate rupee profit or loss.
Tick size
The tick size is the smallest permitted price step. NSE currently links the tick size for index futures to the index level.
| Index level | Index-futures tick size |
|---|---|
| 0 to 15,000 | 0.05 point |
| Above 15,000 to 30,000 | 0.10 point |
| Above 30,000 | 0.20 point |
At a Nifty level of 25,200, the tick size is 0.10 point.
Rupee value of one tick = 0.10 x 65 = ₹6.50 per lot
Contract details at a glance
| Field | Nifty futures example | Practical meaning |
|---|---|---|
| Instrument | FUTIDX | Confirms that you selected an index future |
| Underlying | NIFTY | Links the contract to the Nifty 50 |
| Expiry | 28 July 2026, for example | Identifies the exact monthly contract |
| Lot size | 65 units | Converts points into rupees |
| Contract value at 25,200 | ₹16,38,000 | Shows the notional exposure of one lot |
| Tick size at 25,200 | 0.10 point | Smallest permitted quote change |
| Final settlement | Cash settled | No physical Nifty units exist to deliver |
Why the Futures Price Differs From Nifty Spot
The Nifty spot level and a Nifty futures price usually remain close, but they do not have to be identical before expiry.
Basis
The difference is called the basis:
Basis = Futures price - Spot price
Example:
Nifty spot = 25,200
Near-month Nifty future = 25,260
Basis = 25,260 - 25,200 = +60 points
A positive basis means the future is above spot. Market participants may call this a futures premium or contango. A negative basis means the future is below spot, sometimes called a discount or backwardation.
Quick check: This use of “premium” is a spot-futures comparison. It is not the option premium explained in Module 1.
Cost of carry
A simplified fair-value relationship is:
Futures price is approximately spot price + financing cost - expected dividends
Suppose:
Spot Nifty = 25,200
Time to expiry = 30 days
Illustrative annual financing rate = 7%
Expected dividend effect = 80 index points
Approximate financing cost:
25,200 x 7% x 30 / 365 = about 145 points
Simplified fair futures value:
25,200 + 145 - 80 = about 25,265
The financing cost pushes the theoretical futures value above spot because capital has a time cost. Expected dividends pull it down because an investor holding the underlying shares may receive dividends, while a Nifty futures holder does not.
This is an educational approximation, not a live trading signal. Actual prices reflect changing interest rates, dividend expectations, demand, supply, transaction costs and market positioning.
Convergence at expiry
As expiry approaches, the futures price and spot level normally converge because the final settlement of a Nifty future is linked to the Nifty 50 closing value on the last trading day.
| Time to expiry | Nifty spot | Nifty future | Basis |
|---|---|---|---|
| 20 days | 25,200 | 25,260 | +60 |
| 5 days | 25,350 | 25,365 | +15 |
| Final settlement | Prescribed Nifty close | Settled to the prescribed final price | 0 after settlement |
The reduction need not be smooth every minute. However, an expired contract cannot continue trading with a separate unresolved price.
Why this matters: If the Nifty spot level is unchanged but the positive basis contracts, a long futures position can lose money. Your P&L follows the futures price you traded, not the spot chart alone.
How to Read a Futures Trading Screen
Broker layouts differ, but the main futures fields have the same economic purpose. The figures below are illustrative, not live market data.
| Screen field | Illustrative display | How to read it |
|---|---|---|
| Symbol | NIFTY 28 JUL 2026 FUT | Underlying plus the exact monthly expiry |
| LTP | 25,250.00 | Price of the latest futures trade |
| Best bid | 25,249.90 | Highest current buying price |
| Best ask | 25,250.00 | Lowest current selling price |
| Bid quantity | 3,250 units | Quantity available at the best bid |
| Ask quantity | 2,600 units | Quantity available at the best ask |
| Volume | 18,40,000 units | Quantity traded during the session, subject to platform's unit convention |
| Open interest | 1,04,000 contracts | Contracts that remain open |
| Day high / low | 25,410 / 25,080 | Session's highest and lowest traded futures prices |
LTP is not your guaranteed execution price
LTP is the last traded price. A new buy order interacts with sellers near the ask; a new sell order interacts with buyers near the bid.
Suppose:
LTP = 25,250.00
Best bid = 25,249.90
Best ask = 25,250.30
The spread is:
25,250.30 - 25,249.90 = 0.40 point
For one Nifty lot:
0.40 x 65 = ₹26
If the available quantity is small, a market order may execute across several price levels. This difference between the expected and actual execution price is slippage.
Volume and open interest answer different questions
Volume measures how much trading occurred during the session.
Open interest, or OI, measures contracts that remain open.
If a new buyer trades with a new seller, both volume and OI can rise. If an existing long closes and another participant takes over that long position, volume rises but total OI may remain unchanged.
High OI is not automatically bullish. Every open contract has both a long side and a short side.
Check the position screen after every execution
| Position field | What to verify |
|---|---|
| Net quantity | Positive usually means long; negative usually means short |
| Average price | Weighted entry price of the current net position |
| Exact expiry | Confirms that you traded the intended monthly contract |
| LTP | Latest futures price used for the displayed live P&L |
| Day P&L | Current-day result under the broker's display method |
| Overall P&L | Result from the broker's reference or average entry price |
| Margin used | Amount currently blocked for the position |
Screen example: A net quantity of +65 usually means one current Nifty lot long; -65 usually means one lot short. If the order-entry field asks for lots, enter 1 for one lot. If it asks for units, enter 65. Do not assume that every app uses the same convention.
How Futures Profit and Loss Is Calculated
Futures P&L is linear. Each favourable point creates the same rupee gain, and each adverse point creates the same rupee loss.
Long and short formulas
Long futures gross P&L = (Exit price - Entry price) x Lot size x Number of lots
Short futures gross P&L = (Entry price - Exit price) x Lot size x Number of lots
Gross P&L excludes brokerage, taxes, statutory charges, the bid-ask spread and slippage.
Convert Nifty points into rupees
At the current lot size of 65:
| Nifty futures move | One-lot gross P&L |
|---|---|
| 1 point | ₹65 |
| 10 points | ₹650 |
| 50 points | ₹3,250 |
| 100 points | ₹6,500 |
| 500 points | ₹32,500 |
Assume you buy one Nifty future at 25,200.
| Exit price | Price move | Long gross P&L |
|---|---|---|
| 24,700 | -500 points | -₹32,500 |
| 25,000 | -200 points | -₹13,000 |
| 25,150 | -50 points | -₹3,250 |
| 25,200 | 0 | ₹0 |
| 25,250 | +50 points | +₹3,250 |
| 25,400 | +200 points | +₹13,000 |
| 25,700 | +500 points | +₹32,500 |
For a short entered at 25,200, reverse the signs.
Multiple lots and partial exits
If you buy two lots at 25,200 and sell both at 25,320:
Price move = 120 points
Total quantity = 65 x 2 = 130 units
Gross profit = 120 x 130 = ₹15,600
If you sell only one lot, the P&L on that lot is fixed, but the second lot remains open. The position screen should then show +65, not zero.
Beginner trap: An exit order that is rejected, unfilled or partly filled does not close the entire position. Always confirm the final net quantity.
Closing, Expiry and Rollover
Close before expiry
Use an equal and opposite trade in the same underlying and expiry:
Long one July Nifty future -> sell one July Nifty future.
Short one July Nifty future -> buy one July Nifty future.
Check that the order executed and net quantity is zero. A pending order has no closing effect until it trades.
Hold a Nifty future to expiry
Nifty is an index, not a security that can be delivered. An open Nifty futures position is therefore finally settled in cash using the prescribed final settlement price linked to the Nifty 50 closing value on the last trading day. The expired contract then ceases to exist.
You do not exercise a future. It either remains open for final settlement or is closed with an offsetting trade.
Roll into the next month
Rolling means closing the current contract and opening the same directional position in a later expiry.
Beginner trap: A roll is two trades. If only one leg executes, your market exposure may temporarily be different from what you intended.
Stock futures are physically settled
The cash-settlement explanation above applies to index futures such as Nifty. Open stock-futures positions can create physical delivery obligations at expiry in India:
A long stock future can create a security-receivable or purchase obligation.
A short stock future can create a security-deliverable or sale obligation.
This may require the full funds needed to receive shares or the shares needed to deliver them. Delivery margins and broker cut-offs can also apply before expiry. Do not carry a stock future into expiry based on the Nifty cash-settlement example.
Futures-Specific Mistakes to Avoid
- Closing the wrong expiry: Selling August does not close a July long.
- Confusing lots and units: One lot may be entered as 1 or 65 depending on the broker field.
- Using spot for the P&L calculation: Your entry and exit are futures prices, so a change in basis can affect the result.
- Treating LTP as an executable quote: The available bid or ask, market depth and order size determine the fill.
- Ignoring partial execution: A partly filled exit leaves an open residual quantity.
- Assuming index and stock expiry work alike: Nifty futures are cash settled; stock futures can create delivery obligations.
- Treating rollover as automatic: Rolling requires closing one contract and opening another, usually at different prices.