The Futures Trade – How It Actually Works

After understanding how futures contracts work, Rajesh felt ready to go deeper.

“Priya,” he said, “I understand the theory. But how does an actual trade happen in real life?”

Priya smiled.

“Good. Now we move from theory to practice.”

Before Taking a Trade

Priya began with a simple idea.

“Every trade starts with a view.”

Rajesh asked, “What kind of view?”

Priya explained.

A trader must have a directional view:

• Expect price to go up → Buy futures
• Expect price to go down → Sell futures

Rajesh nodded.

“So profit depends on whether my view is correct.”

“Exactly,” Priya said.

A Practical Trading Situation

Priya gave an example.

A company’s stock falls sharply after some negative news.

Rajesh said, “That means the market is pessimistic.”

“Yes,” Priya replied. “But what if you believe the reaction is overdone?”

Rajesh thought for a moment.

“Then I would expect the price to go up.”

“Correct. That’s a bullish view.”

Choosing Futures Instead of Spot

Rajesh asked, “Why not just buy the stock?”

Priya replied, “You can. But futures offer advantages, which we will explore later.”

“For now, let’s focus on how the trade works.”

Looking at the Futures Contract

Priya explained what a trader checks before trading:

• Asset name (stock or index)
• Futures price
• Expiry date
• Lot size

Rajesh said, “So I cannot choose quantity freely?”

“Right,” Priya replied. “You must trade in lot size.”

Understanding Contract Value

Priya continued.

The total value of the trade is:

Contract Value = Lot Size × Futures Price

“This helps you understand the actual exposure,” she added.

Entering the Trade

Rajesh asked, “What happens when I press buy?”

Priya explained step by step.

Step 1: Margin Check

The system checks if you have enough margin in your account.

If not, the trade will not go through.

Step 2: Finding a Counterparty

The exchange matches your order with someone who has the opposite view.

Step 3: Agreement Confirmation

Both buyer and seller are now part of the contract.

Step 4: Margin Blocked

The required margin is blocked in your account.

Priya added, “All of this happens within seconds.”

Rajesh smiled.

“That’s faster than I expected.”

What Does “Buying Futures” Mean?

Rajesh asked, “What do I actually own after buying?”

Priya explained clearly.

“You enter into an agreement to buy the asset at a future price.”

It does not mean:

• You immediately own the stock
• You receive delivery right away

It means:

• You are exposed to price movement

What Happens After the Trade?

Priya continued.

After entering the trade, three outcomes are possible.

Scenario 1: Price Goes Up

• Buyer gains
• Seller loses

Scenario 2: Price Goes Down

• Buyer loses
• Seller gains

Scenario 3: Price Stays Same

• No profit or loss

Priya explained, “In futures, one person’s gain is another person’s loss.”

Can You Exit Before Expiry?

Rajesh asked an important question.

“Do I have to wait till expiry?”

Priya shook her head.

“No. This is the biggest advantage of futures.”

You can exit anytime.

What is “Square Off”?

Priya explained.

Closing a futures position is called square off.

• If you bought → you sell to exit
• If you sold → you buy to exit

What Happens During Square Off?

Priya explained step by step.

• Your position is transferred to another trader
• The trade happens at the current market price
• Your profit or loss is calculated
• Margin is released
• Money is credited or debited to your account

Rajesh said, “So I don’t need to deal with the original counterparty?”

“Exactly,” Priya said. “The exchange handles everything.”

Holding vs Exiting

Priya added an important point.

You have two choices:

• Exit early and book profit or loss
• Hold till expiry

Rajesh asked, “Which is better?”

Priya replied, “That depends on your view and risk tolerance.”

Risk in Futures Trading

Priya reminded him.

“As long as you hold the position, you carry risk.”

Price can move:

• In your favour → profit
• Against you → loss

Rajesh said, “Now I understand. Futures trading is about taking a view and managing it.”

Priya nodded.

“Yes. And knowing when to enter and exit is equally important.”

Rajesh added, “And I don’t have to wait till expiry.”

“That’s the power of futures,” Priya replied.

Key Takeaways

• Futures trading starts with a directional view
• You must trade in fixed lot sizes
• Contract value represents total exposure
• Margin is required to enter a trade
• Trade execution happens instantly via exchange
• Profit or loss depends on price movement
• One trader’s gain is another’s loss
• Positions can be closed anytime using square off
• Margin is released after closing the position
• Risk exists as long as the position is open