What Are The Possible Scenarios After Buying A Futures Contract
Once you are into a futures contract you may have to face three possible scenarios. The three scenarios are that the price could go up, the price could come down or the price could stay where it is.
The price goes up
If the directional view was that the futures price will go up and the futures price does go up then you end up in a profit. When the spot price increases, so do the futures price. You buy the shares of the company as per the futures contract price and then you end up gaining in this transaction.
The seller of the futures contract, in turn, ends in a loss because he has to sell the futures contract at a lower price as per the futures contract instead of the price in the market today. The buyer’s gains and the seller loses in this case.
The price goes down
In this case, you were the buyer of the futures contract but the price went down. Thus you end up losing on this trade. The price of the stock goes down and so does the futures price. This means that since the price of the futures contract went down you still have to sell the stock at a higher price as compared to what the market is offering today.
You have to buy the futures of the share at a higher price than buying it lower from the market. The seller gains here and you the buyer lose out on this trade.
The stock price remains the same
In this scenario neither does the buyer nor does the seller have any advantage and this scenario does not impact any of them.
The futures can be traded
There could is a situation when you buy futures position and the very next day the price of the futures contract shoots up. You make a good overall profit. You are happy with the money that you have earned and you plan to sell off the futures contract on the very next day.
Futures allow you to do so. You do not have to hold on to the contract till expiry. You can easily get out of the futures contract position at any time and transfer the money to someone else.
When you sell off the futures position it is known as squaring off. This lets you offset the position that is existing. The squaring off can be done by either calling the broker and asking him to do so or by doing it online on the terminal.