Futures & Options: Margins, Lot Sizes and the Risk You Are Taking

A derivative is a contract whose value comes from something else — an index or a share. Futures and options let you take a view with less capital than buying the underlying, which is exactly what makes them risky.

Lot size

Derivatives trade in fixed lots set by the exchange, not single units. One lot of an index future controls the index value multiplied by the lot size, so a small move in the index is a large move in rupees.

Margin is not the price

To buy or sell a future, or to sell an option, you post margin — a fraction of the contract value. The exchange computes it using SPAN plus an exposure margin, and it changes with volatility.

• Your profit and loss is settled in cash every day (mark-to-market). A losing position draws money from your account daily.
• If your balance falls short, you must add funds or the position can be squared off.
• Option buyers pay the premium in full and cannot lose more than that. Option sellers receive the premium and carry open-ended risk.

Expiry

Every contract has an expiry date. Index options are cash-settled. Stock derivatives are physically settled: if you hold a stock futures or in-the-money stock option position to expiry, you may have to give or take delivery of the shares, with the full contract value in play. Margins rise as expiry approaches for this reason.

Using derivatives to reduce risk

Hedging is the original purpose. A holder of a share portfolio can buy index puts as insurance against a broad fall, accepting the premium as the cost. Hedged positions typically attract lower margin than naked ones.

Before you place a first trade

• Know the maximum loss on the position in rupees, not percentages.
• Decide your exit before entering.
• Start with one lot.
• Keep spare margin; do not run the account at its limit.

This article is for investor education. It is not investment, tax or legal advice and is not a recommendation to buy or sell any security. Investments in the securities market are subject to market risks; read all related documents carefully before investing.