Derivatives: Underlying Assets, Lot Sizes & Settlement
Understand what financial derivatives are, how contract specifications, standardized lot sizes, notional value, and physical vs cash settlement work across Indian indices and stocks.
Interactive Simulation & Visual Mechanics
Interact with the live mathematical model, order book, or candlestick structural diagram to understand the mechanics intuitively.
Interactive Concept Simulation
- Strict adherence to standardized contract specifications and risk limits.
- Execution automated via algorithmic slicing (TWAP, VWAP, Iceberg).
- Trading without accounting for transaction friction, slippage, and STT.
- Ignoring higher-timeframe macro regime and volume profile.
How the Mechanism Operates
Derivatives provide economic exposure to substantial underlying asset value with a fraction of the capital deployed as margin.
In India, derivatives trade on the National Stock Exchange (NSE) and BSE. Index contracts (NIFTY, BANKNIFTY) are Cash Settled: on expiry day, the clearing house calculates the final settlement price based on the volume-weighted average price (VWAP) of the last 30 minutes of the underlying index, and debits/credits the net rupee difference directly to trading accounts.
Stock derivatives (e.g., Reliance, Tata Motors) are Physically Settled. If an in-the-money stock future or option expires, the trader must either deliver 100% of the cash value to take delivery or deliver actual shares from their demat account.
Physical Settlement Obligation on Stock Futures
A trader held 1 Long Future of Tata Steel into expiry @ ₹150 with ₹1.8L margin.
The future expired in-the-money. Because stock derivatives are physically settled, the trader was obligated to take delivery of 5,500 physical shares.
Total physical delivery funding required: 5,500 × ₹150 = ₹8,25,000 cash in demat account.
★ Always roll over or square off stock derivatives before expiry week if you do not possess the full 100% cash funding for physical delivery.
Non-Negotiable Risk Guidelines
Common Pitfalls & Remedies
Why it happens: Stock futures require full 100% cash delivery funding if held through expiry, whereas index futures are cash settled.
Remedy: Close stock futures 2 days prior to expiry or roll over to the next monthly contract.
Frequently Asked Questions
Why do lot sizes change periodically in Indian markets?
SEBI mandates that the notional value of derivative contracts should generally remain within a target band (₹5 Lakh to ₹10 Lakh). When stock prices double or split, exchanges revise lot sizes quarterly to maintain standard contract sizes.
Related Playbooks & Sibling Concepts
Trade in the direction of an established uptrend or downtrend, riding momentum until clear reversal signals emerge.
A market-neutral statistical arbitrage strategy that trades two historically correlated securities when their price spread temporarily diverges beyond historical standard deviations.
Master the mathematics of futures pricing, the Cost of Carry model, risk-free interest rates, dividend adjustments, fair value calculations, and cash-futures arbitrage.
Understand SEBI peak margin rules, SPAN + Exposure margins for derivatives, Mark-to-Market (MTM) daily settlement, and how to manage margin calls without triggering auto-liquidation.