5.1 – How to take a futures trade
In the last chapter, we learned various concepts related to the futures market. Remember, the motivation for any trader entering into a futures agreement is to benefit financially. The trader needs to have a directional view of the underlying asset’s price. Perhaps we take up a practical example of a futures trade video to demonstrate how this is done.
In the following video, we will understand how the settlement of a futures trade is carried out.
We recommend reading this chapter on Varsity to learn more and understand the concepts in-depth.
Key takeaways from this chapter
- If you have a directional view on an assets price, you can financially benefit from it by entering into a futures agreement.
- To transact in a futures contract, one needs to deposit a token advance called the margin.
- When we transact in a futures contract, we digitally sign the agreement with the counterparty; this obligates us to honour the warranty.
- The futures price and the spot price of an asset are different; this is attributable to the futures pricing formula (we will discuss this topic later)
- One lot refers to the minimum number of shares that needs to be transacted.
- Once we enter into a futures agreement, there is no obligation to stick to the agreement until the contract expires.
- Every futures trade requires a margin amount; the margins are blocked when you enter a futures trade.
- We can exit the agreement anytime, which means you can leave the deal within seconds of entering the contract.
- When we square off an agreement, we essentially transfer the risk to someone else. Once we square off the futures position, margins are unblocked.
- The money you make or lose in a futures transaction is credited or debited to your trading account the same day.
- In a futures contract, the buyer’s gain is the seller’s loss and vice versa.