Important Futures Trading Terms Every Trader Must Know Before Trading
Many traders jump into futures without understanding the basics.
These important futures trading terms can save you from costly mistakes.
Buy
“Buy in stock” means purchasing shares of a company with the intention of owning them, expecting the price to increase in the future so they can be sold at a profit.
Example
If you buy 100 shares of TCS at ₹3,500:
You own 100 shares of TCS
If price rises to ₹3,700, you can sell and make profit
If price falls, you incur a loss
Sell
“Sell in stock” means disposing of shares you own (or have traded) at the current or chosen price to book profit or cut loss.
Example (Delivery)
You bought 100 shares of Infosys at ₹1,400.
You sell at ₹1,480 → Profit = ₹80 × 100 = ₹8,000
If you sell at ₹1,350 → Loss = ₹50 × 100 = ₹5,000
Call Option
In a call option, the buyer has the right, but not the obligation, to buy the underlying asset at a predetermined (strike) price within a specified time period. The buyer benefits when the price of the underlying asset rises above the strike price.
Put Option
In the Put Option, the buyer has the option/right but not the obligation, to sell the underlying asset at a fixed price. Here, the buyer of the Put option profits when the price of underlying asset goes down.
Strike Price
The strike price is the price at which the buyer or seller has the right to buy or sell the asset. In a futures contract, the strike price determines the profit or loss of the position based on market movements.
For instance, If we have a call option strike price at Rs 2100 and at the time of expiry the price is Rs 2900, then the difference of Rs 800, calculated from the strike would be the pay off.
Had the strike price been Rs 2500, then the payoff would have been Rs 400 instead of Rs 800.
Strike price Rs 2100 ——————————— Exercise price Rs 2900. Profit Rs 800.
Exercise Price
The exercise price of an option is the price at which the underlying asset can be bought or sold on the expiry date. The difference between the market price of the asset and the strike (exercise) price determines the profit or loss in an option contract.”
Expiry
Expiry Date refers to the date till which the option contract is valid. The price of the underlying asset on this particular date forms the Exercise Price. In India expiry for shares related options happen to be the last Thursday of each month.
Lot Size
Single option contracts cannot be purchased. They have to be bought and sold in lots. The number of contracts in each lot determines the Lot size. So, if an option contract is worth Rs 5 and has a lot of 2000 contracts, then each lot costs Rs 10,000.
Rs 5 * 2000 shares = Rs 10,000.
Premium
The premium is the price paid by the buyer to enter into an options contract. It represents the cost of the option or the right being purchased, and the premium paid plays a key role in determining the profitability of any options strategy.
Bid Price
Similar to futures, options also operate on an auction-based model. The highest price a buyer is willing to pay is known as the bid price. Any seller who wants to sell immediately must do so at this bid price.
Buyer A = Rs 450 Buyer B = Rs 500 Buyer C = Rs 800 Buyer D = Rs 300 ——– Highest Bid is Buyer C = Rs 800
Ask Price
The ask price is the lowest price at which a seller is willing to sell an option contract. Any buyer who wants to purchase immediately must pay this ask price.
Seller A = Rs 650 Seller B = Rs 400 Seller C = 700 Seller D = Rs 200 —– Lowest Ask is Seller D = Rs 200
Bid - Ask Spread
The spread is the difference between the bid price and the ask price of an asset. Buyers aim to purchase at the lowest possible price, while sellers seek to sell at the highest possible price.
Highest Bid Rs 500 —– Spread Rs 50 —– Lowest Ask Rs 550
Open Interest
Open Interest refers to the total number of options that currently exist in the market at different strike prices for any particular underlying asset.
For example: ICICI Bank will have different number of call options and put options at different strike prices. This is called Open Interest at different strike prices.
Break Even Point
The break-even price is the price at which the buyer or seller of an option contract makes neither a profit nor a loss.
For example, if the strike price of a call option is ₹2100 and the premium paid is ₹50, the break-even price at expiry would be ₹2150.
Strike Price Rs 2100 —– Premium Rs 50 —– Exercise Price Rs 2150
Volatility
Volatility in stock trading refers to the degree of variation in a stock’s price over a period of time.
Higher volatility indicates larger and faster price movements, while lower volatility indicates more stable prices.
Support
Support is a price level at which a stock tends to stop falling because buying interest is strong enough to prevent further decline.
It acts as a floor where demand outweighs supply, often leading to a price bounce.
Resistance
Resistance is a price level at which a stock tends to stop rising due to increased selling pressure.
It acts as a ceiling where supply outweighs demand, often causing the price to reverse or pause.
Higher High (HH)
A higher high is formed when the current price peak is higher than the previous price peak.
It indicates upward momentum and confirms an uptrend in the market.
Lower Low (LL)
A lower low is formed when the current price falls below the previous price low.
It indicates downward momentum and confirms a downtrend in the market.
Squaring Off
Squaring Off a position basically means exiting a position that you have selling the contract that you own. Here, we take the opposite trade to the current position. If you sell futures contract that you have bought, or buy shares that you had previously short sold it is called Squaring Off.
Example: If you have bought TCS Future, you will have to sell it to square off the position remove your exposure. If you had previously short sold, then you will have to buy to square off eh position.
TCS = Rs 3000 Bought —————————————— Rs 2995 Sold (Loss of Rs 5)
Premium or Discount
Future contracts quote at a similar price as the underlying asset but not exactly same. If the future contract is quoting higher than the cash market, it is called Premium. If it quoting at a price lower than the cash market, it is called Discount.
Example: Each share of TCS is trading for Rs 2150. Now, if the future contract is quoting for Rs 2175, then we can say that it is trading at a premium. If the contract is trading at Rs 2125, then we can say that it is trading at a discount. It is suggested to check for at least 5 companies, if the future contract is trading at a discount or premium.
Margin
A security amount that is deposited with the broker that they can use to meet the liabilities in case there is a loss, is called Margin. This is mandatory in futures contracts. If Margin falls below a certain amount than you are required to refill the same otherwise the broker will square off your position.
Initial Margin
Initial margin is the security deposit required to enter a futures contract.
You must maintain this amount in your trading account—brokers may allow margin using your assets as collateral, but some cash is still needed for daily mark-to-market losses.
For example, if a futures contract value is ₹5,00,000 and the margin required is 20%, you must maintain ₹3,00,000 as margin—partly from collateral and partly as cash for daily mark-to-market adjustments.
Margin = Rs 2,00,000*20% = Rs 40,000
Maintenance Margin
Maintenance margin is the minimum balance you must maintain to keep your futures position open.
If your margin falls below this level, you need to add funds to continue holding the trade—and remember, margin is not your maximum loss; losses can exceed it. In most cases, the maintenance margin is the same as the initial margin.
Expiry Date
Contract expiry is the final date up to which a futures contract remains valid.
All profits and losses must be settled by this date—every derivatives contract has an expiry, and in India, stock futures typically expire on the last Thursday of each month.
Settlement
Settlements refer to the actual payment of the profits and losses. For Futures as we discussed earlier, the settlements are done on a daily basisi.
Bid Ask Spread
The stock market works on an auction system where buyers and sellers quote their prices.
Buyers place a bid (highest price they’re willing to pay) and sellers place an ask (lowest price they’re willing to accept). When both prices match, the trade happens. The gap between them is called the bid–ask spread—you buy at the ask price and sell at the bid price.
The Bid price is the price quoted by buyers to purchase the asset.
The Ask price is the price quoted by sellers to sell the assets.
SPREAD = LOWEST ASK PRICE – HIGHEST BID PRICE
The spread is simply the gap between the bid price and the ask price of an asset.
In highly liquid markets with many buyers and sellers, this gap stays narrow, but when participation is low, the spread widens—effectively increasing your transaction cost every time you enter or exit a derivative trade.
Implied Volatility
Implied volatility reflects the market’s expectation of how much an asset’s price may move in the future.
Higher implied volatility signals bigger expected price swings and leads to higher option premiums, making it one of the most critical factors in option pricing.
Lot Size
In Futures and Options, trades are done in fixed lots, not in single shares.
Each lot represents a predefined number of shares called the lot size, and all trades must be in multiples of this size—for example, you can’t trade 1 share of TCS in futures; you must trade at least one lot, say 200 shares.
200 shares * Rs 100 = Rs 20,000
Arbitrage Opportunity
An arbitrage opportunity arises when the same asset is priced differently across markets or contracts.
For example, if there’s a wide gap between the spot price and the futures price, a trader may buy the shares and sell the futures, knowing both prices converge at expiry.
Such trades aim to profit from temporary market inefficiencies, and they can appear in many forms using different strategies.
Buy Rs 50,000 ————- Sell Rs 55,000
Long Position (Buyer)
A trader who buys a futures contract is said to be long on the contract.
They enter the trade with the expectation that prices will rise, allowing them to buy now and sell later at a higher price to make a profit.
Short Position (Seller)
A trader who sells a futures contract is said to be short on the contract.
They expect the price of the underlying asset to fall, aiming to sell at a higher price now and buy it back later at a lower price to profit.
Spot Price
The spot price is the current price at which an asset is trading in the market.
For example, if TCS is trading at ₹3,000, that is its spot price.
Futures Price
The futures price is the price at which a futures contract of an asset is currently trading.
The same asset can have different futures prices for different expiry dates—for example, TCS Nov 21 Futures trading at ₹2,900.
Today —————————————————————————————-Future Date
Contract Cycle
The contract cycle refers to the period during which a futures or options contract is available for trading—from its launch to its expiry.
It also shows how many expiry contracts are traded at the same time for the same asset; for example, in India, stocks like TCS usually have three contracts trading together—near-month, next-month, and far-month expiries.
Index Futures
Instead of buying individual shares, you trade the index itself (like NIFTY 50 or BANK NIFTY), betting on where the market will go.
Common Index Futures
NIFTY 50 Futures
BANK NIFTY Futures
FINNIFTY Futures
MIDCPNIFTY Futures
SENSEX Futures
Stock Futures
Stock Futures are derivative contracts where you agree to buy or sell a specific company’s shares at a fixed price on a future date. Unlike index futures, these are based on individual stocks (Reliance, TCS, HDFC, etc.).
Common Stock Futures in India 🇮🇳
Examples traded on NSE:
RELIANCE Futures
TCS Futures
HDFCBANK Futures
INFY Futures
ICICIBANK Futures