The forward: a promise with a price
Suppose you agree today to buy 65 NIFTY-worth of index exposure from me in two weeks at 23,700, whatever the index does in between. That is a forward. If NIFTY is at 24,200 on the day, you buy from me at 23,700 and are 500 points × 65 = ₹32,500 better off; I am the same amount worse off. If NIFTY is at 23,200, the reverse. Neither of us paid anything today; we simply exchanged a promise. A forward is a zero-sum bet on the price at a fixed date.
Forwards have two problems: you have to trust me to pay, and you cannot get out early because the contract is private. Exchanges solved both.
The future: a forward, standardised and guaranteed
A futures contract is a forward with three changes. The terms are standardised (fixed lot, fixed expiry dates, fixed underlying), so the contract is fungible and you can exit by selling to anyone. The exchange's clearing corporation stands between every buyer and seller, so counterparty risk disappears. And profits and losses are settled every day — “marked to market” — so nobody accumulates a debt they cannot pay. To trade one you post a margin, a deposit sized to cover a bad day or two, and the exchange tops it up from you or pays you out nightly.
| Feature | Forward | Future |
|---|---|---|
| Where traded | Privately | Exchange |
| Terms | Negotiated | Standardised |
| Counterparty risk | Yes | None (clearing corp) |
| Settlement | At expiry | Daily mark-to-market + expiry |
| Exit before expiry | Hard | Sell any time |
The option: a right, not an obligation
Now change one thing. Instead of promising to buy at 23,700, you pay me ₹180 per share today for the right to buy at 23,700 in two weeks if you want to. If NIFTY is at 24,200 you exercise: worth 500, cost 180, net +320. If NIFTY is at 23,200 you simply don't; you lose the 180 and nothing more. That is a call option. The ₹180 is the premium; 23,700 is the strike; the date is the expiry. A put option is the mirror: the right to sell at the strike.
The person who sold you that right — the writer — keeps the ₹180 whatever happens, and in exchange takes on the obligation to deliver if you exercise. Buyer: limited loss, unlimited upside, pays. Writer: limited gain, potentially large loss, is paid. Every option trade has one of each.
Vocabulary you'll use every day
| Term | Meaning |
|---|---|
| Underlying | What the contract is on: NIFTY 50, BANKNIFTY, a stock. |
| Lot size | Number of underlying units per contract. Fixed by the exchange; revised periodically. Your P&L is always per-share change × lot. |
| Expiry | The date the contract settles. Weekly for index options, monthly for stocks. After expiry the contract does not exist. |
| Strike | The price at which an option can be exercised. Strikes are spaced at a fixed step (NIFTY: 50 points). |
| Premium | The price of an option, quoted per share. A “₹180 call” costs ₹180 × lot. |
| Margin | Collateral the exchange holds against a futures or short-option position. Option buyers pay the full premium and post no margin. |
| Open interest (OI) | Number of contracts currently open. Rises when new positions are created, falls when they are closed. |
| Long / short | Long = you bought (you profit if price rises / the option gains). Short = you sold first (you profit if it falls / decays). |
Here are those terms on today's NIFTY contract — the lot, the strike step and the nearest expiry, straight from the exchange's instrument master:
What settles how
Index derivatives are cash-settled: at expiry the difference between the strike (or futures price) and the index's final settlement value is simply credited or debited. Stock derivatives are physically settled: an in-the-money stock option at expiry becomes an actual delivery of shares, with the full contract value changing hands. A ₹10,000 option position can turn into a ₹15 lakh delivery obligation on expiry day. Chapter 9 is entirely about this.
Next: how futures are priced and margined, with the live NIFTY level.