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Q&A: Futures Versus Cash


Suhail Kazi writes in on the derivatives post with a few questions that I thought belong in a separate post.

a) Is there a T+2 (or other) settlement period for futures similar to stocks?

No; when you buy a future you own it. The “settlement” is only at expiry, and it’s in cash – that is positions are netted out and resulting cash paid.

b) If I buy a one-month future position, then at the end of expiry (24/11) with no further action on my part, will my demat a/c increase to 500? Will I be charged the usual broking/STT charges same as if I’d bought add’l 250 shares at my strike price?

Indian stock futures are cash settled, so there is no conversion of a futures position into shares. You just get charged the difference between your buy price and the market price every day till expiry.

c) If I don’t want (b) to happen, and I don’t want to square off by selling it, how to continue (‘roll-over’ -is that the term used by traders?) the long position into the next month? I don’t see any rollover button/link anywhere on my screen.

Rollover is a process of doing two trades – exiting current month position and entering a new position for the next month. In NSE NOW (one of the software pieces that some brokers use), you can create a “spread” order which tells the exchange to take on both trades simultaneously if the difference between the prices ever comes closer than a number you specify. (Say a spread of 5, and the exchange will try to get both trades with less than 5 rupees paid as the net difference per share)

d) If I sell one lot, and I don’t, on expiry will my existing 250 shares be deducted? ~ Similarly how to avoid it if I want to continue this short position to next month without affecting my demat holding.

Again, cash settled, so your demat holding is not touched.

e) And if the answer to (d) is Yes, then: In the chart above, at several points (say peak of 2008) the difference between futures and stock pricing is so much that if I simultaneously sell a future lot and buy eqvlnt stocks I stand a guaranteed gain, no matter how the price moves after that. Essentially an arbitrage? Is that correct?

There isn’t much of an arb nowadays between cash and futures unless it’s on the other side (that is, cash is higher than futures, and you can’t take advantage because you can’t have a short position on the stock)

f) Can you add a bit about the brokerage/STT etc behind it? Is it charged daily on M2M basis or lumpsum on initial transaction, squareoff, expiry settlement or some combination? Will help if you continue with yr 1-lot ICICI example to explain it.

There is no brokerage on a daily basis, but M2M is done and cash taken out or added in. STT is one time – on the sell side. There’s a futures tutorial you can look at as well. Hope that helps!

(Thanks Suhail for writing in!)


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