Futures risk management
A futures contract gives large exposure for a small margin deposit. That leverage multiplies gains and losses equally, and losses are collected in cash every day.
How the leverage works
If a contract is worth 10,00,000 and the margin is 1,50,000, a 5% adverse move costs 50,000, roughly a third of the margin deposited. Exposure, not margin, is what you should size to your risk.
Sizing a futures position
lots = (capital x risk %) / (stop distance in points x point value x 1 lot)Example (hypothetical): capital 5,00,000, risk 1% = 5,000. A stop 40 points away and a point value of 25 per lot gives a risk of 1,000 per lot, so up to 5 lots would risk 5,000. Check that the margin and your total open risk allow it.
Daily mark-to-market and margin calls
Profits and losses are settled daily. A fall in the account balance can mean a margin shortfall, which brokers may penalise and which can force a liquidation at a bad price. Keep spare cash beyond the minimum margin, since margin requirements can rise on volatile days. Exchanges and SEBI have also tightened rules on peak margin and on intraday leverage; check your broker's current requirements.
Expiry, rollover and delivery
- Index futures are cash settled. Stock futures are settled by physical delivery in many cases, so holding to expiry can create an obligation to deliver or take shares. Close or roll before expiry unless you intend to take delivery.
- Rolling to the next month costs the spread between the two contracts plus brokerage.
- Commodity futures such as crude oil or gold on MCX have their own lot sizes, tick values, trading hours and settlement terms. Read the contract specification on the exchange website before trading.
Specific risks
- Overnight gaps from global markets, especially in index and commodity futures.
- Event risk: central bank decisions, inventory reports, budget and policy announcements.
- Liquidity: far-month contracts and less active stocks have wider spreads.
- Currency risk for commodities priced in dollars.
Practical rules
- Fix a maximum loss per trade and per day, in rupees, before the market opens.
- Use hedges (for example an offsetting option) where the cost is acceptable.
- Never add to a losing futures position to recover.
- Keep total notional exposure within a multiple of capital that you can explain.
- Reconcile your contract notes with your own records every week.