Executing Futures Trades: Practical Application in Equity Markets

Establishing Market Context

The previous chapter explored various dimensions of futures trading mechanisms. Every trader participating in futures contracts shares a singular objective—generating profitable returns. Achieving this goal necessitates developing informed perspectives regarding the underlying asset’s valuation trajectory. Moving beyond precious metals examples, equity securities now provide the contextual framework for demonstrating practical trade execution.

Analysing Market Opportunities

On 15th December 2014, Tata Consultancy Services (TCS) shareholders attended the management’s quarterly gathering. Whilst investors appreciated the announcement itself, cautious commentary regarding potential revenue growth for the December quarter triggered negative sentiment. Consequently, TCS share prices declined over 3.6% in spot market trading, as evidenced by market quotations from that session.

From a trading perspective, this market reaction appears disproportionate to the underlying fundamentals. The Indian information technology sector characteristically experiences subdued activity during December—coinciding with the financial year-end for their primary market, the United States, coupled with holiday season slowdowns. Such seasonal patterns remain well-documented, suggesting the 3.6% decline lacks justification. This scenario presents an attractive entry opportunity, as TCS share prices appear positioned for recovery. Therefore, establishing a long position in TCS warrants consideration at this juncture.

This analysis yields a bullish outlook on TCS. The assessment suggests substantial probability of share price appreciation over subsequent periods. Expressed alternatively, a constructive stance exists regarding TCS’s current valuation.

Rather than acquiring TCS shares through spot market transactions, purchasing TCS futures contracts offers an alternative approach (with detailed mechanics explored subsequently). The requisite information—futures trading prices—remains readily accessible via the National Stock Exchange website. Conveniently, spot market quotations provide direct links to corresponding futures contract data, streamlining information access.

Futures prices inherently track spot prices—depreciation in spot markets precipitates corresponding futures price declines. NSE website data confirms TCS futures quotations reflecting concurrent market movements.

Predictably, TCS futures declined 3.77%, aligning with spot price depreciation. This observation prompts two pertinent questions:

Why does the TCS futures contract decline 3.77% whilst spot markets fell only 3.61%—what explains this differential?

TCS spot prices stand at ₹2,362.35, yet futures trade at ₹2,374.90—what accounts for this premium?

Both constitute legitimate queries at this stage. Comprehensive answers emerge through examination of futures pricing formulas. Significantly, both spot and futures prices experienced synchronised daily declines. Before advancing further, reviewing the futures contract specification and identifying essential parameters proves beneficial.

Decoding Contract Specifications

Examining the contract header reveals three critical facts:

The underlying asset comprises company equity securities, with the instrument classified as ‘stock futures’

The security symbol ‘TCS’ identifies the specific company

This TCS futures contract expires on 24th December 2014. Notably, all Indian derivative contracts conclude on the final Thursday of each month. Contract expiry mechanics warrant subsequent detailed exploration

The displayed information simply illustrates current futures pricing.

Finally, two essential parameters merit attention—underlying value and market lot specifications:

TCS shares’ underlying value at snapshot timing registered ₹2,359.95, compared against the spot market price of ₹2,362.35, reflecting minor subsequent depreciation

Futures contracts employ standardised, predetermined specifications. The TCS futures lot size denotes the minimum share quantity required for transaction execution. Therefore, trading TCS futures mandates purchasing or selling 125 shares (or multiples thereof)

The previous chapter introduced ‘contract value’, calculated by multiplying lot size by futures price. Computing TCS futures contract value proceeds as follows:

Contract Value = Lot size × Futures price

= 125 × ₹2,374.90

= ₹2,96,862.50

Examining an additional futures contract—specifically State Bank of India (SBI)—further consolidates comprehension. SBI futures trade specifications demonstrate similar structural characteristics across different underlying securities.

Executing the Transaction

The TCS futures trade involves acquiring the contract at ₹2,374.90 per share for the minimum quantity of 125 shares, constituting ‘one lot’. This position reflects anticipation of TCS share price appreciation.

Futures contract acquisition proceeds through two channels: telephoning the broker with instructions to purchase one lot of TCS futures at ₹2,374.90, or executing directly through the broker’s trading platform.

Personal preference favours direct execution via trading terminals. Those unfamiliar with platform operations should thoroughly review relevant instructional materials. After adding TCS futures to the market watch, pressing F1 secures the contract.

Behind-the-Scenes Processing

Activating the F1 key on the trading terminal initiates several background processes, expressing purchase interest in TCS futures:

Step One—Margin Verification: Entering futures agreements requires depositing a percentage of contract value as margin. This functions as advance payment or token consideration. Insufficient trading account balances prevent transaction completion. Therefore, the broker’s risk management system conducts pre-agreement verification ensuring adequate fund availability.

Step Two—Counterparty Matching: Following margin validation, the system identifies suitable counterparties. This matching process connects the TCS futures buyer with a seller of identical contracts. The stock market operates as a ‘financial marketplace’ accommodating numerous participants holding divergent asset valuation perspectives. The TCS futures seller presumably anticipates further price depreciation. Just as specific rationale underpins the bullish position, the seller maintains distinct reasoning supporting their bearish stance.

Step Three—Digital Agreement Execution: Upon completing margin validation and counterparty matching, both buyer and seller digitally execute the futures agreement. This constitutes essentially a procedural formality—consenting to purchase (or sell) futures contracts signifies acceptance of contractual obligations.

Step Four—Margin Reservation: Following agreement execution, specified margin amounts become locked within the trading account. These funds remain unavailable for alternative purposes throughout the contract holding period.

After completing these four sequential steps, ownership of a TCS futures contract is established. Remarkably, within trading environments, this entire process executes within seconds.

Understanding Position Ownership

A fundamental question arises: what precisely does owning TCS futures contracts entail?

By purchasing TCS futures on 15th December 2014, a digital agreement was established with a counterparty to acquire 125 shares at ₹2,374.90 per share. This bilateral contract between participant and counterparty concludes on 24th December 2014.

This position represents commitment to the agreed transaction terms, with settlement occurring either through physical delivery or cash adjustment depending on contract specifications and participant preferences. Our futures trading framework provides standardised mechanisms ensuring transparent, regulated transaction completion whilst offering strategic flexibility unavailable through spot market participation alone.