From Protection to Profits: A Simple Guide to Equity Futures (Hedging & Trading Explained)

FROM PROTECTION TO PROFITS: A SIMPLE GUIDE TO EQUITY FUTURES

INTRODUCTION: YOUR MARKET SEATBELT AND ACCELERATOR

Imagine locking today's price for something you'll buy next month. That's what equity futures do—for stocks,including single-stock futures and even index futures in broader markets.

Futures contracts explained simply: they are agreements to buy or sell shares at a fixed price on a future date, and they trade on NSE and BSE just like regular stocks.

They serve two purposes:

Shield (Futures Hedging): Protect your portfolio when markets turn shaky

Sword (Futures Trading): Amplify profits by predicting market moves correctly

Think of futures as your seatbelt and accelerator—they can save you in a crash or help you speed ahead. But push too hard, and risks multiply fast because futures margin and leverage increase both gains and losses..

1.HEDGING – USING FUTURES AS PROTECTION

LONG HEDGE: PROTECTING A FUTURE PURCHASE

When to use: You plan to buy shares later but worry prices will rise before you buy.

How it works: Buy futures today to lock in today's price. If the stock becomes expensive later, futures profit covers the extra cost.

Simple example:

You plan to buy 1,500 shares on January 31, 2026.

Today (December 31, 2025):

• Spot price: ₹1,455

• Futures price: ₹1,457.30

• Your worry: Price may jump after quarterly results

What you do: Buy January futures contract

What happens:

Stock rises to ₹1,485

• Market cost: ₹1,485 × 1,500 = ₹22,27,500

• Futures profit: ₹27.80 × 1,500 = ₹41,700

• Effective price: ₹1,457.20 per share

Result: Despite the ₹30 rise, you effectively bought at ₹1,457—near the original futures price.

Also, if Price Falls - You save money on the stock purchase, but lose an equal amount on the futures, locking your cost at the original higher price.

SHORT HEDGE: PROTECTING A FUTURE SALE

When to use: You plan to sell shares later but worry prices will fall before you sell - a practical form of futures risk management..

How it works: Sell futures today to lock in today's selling price. If the stock drops later, futures profit offsets the lower market price.

Simple example:

You plan to sell 1,200 shares on January 31, 2026.

Today (December 31, 2025):

• Spot price: ₹1,690

• Futures price: ₹1,706

• Your worry: Negative news may push prices down

What you do: Sell 2 futures contracts (600 shares per lot)

What happens:

Stock falls to ₹1,440

• Market sale: ₹1,440 × 1,200 = ₹17,28,000

• Futures profit: ₹265 × 1,200 = ₹3,18,000

• Total received: ₹20,46,000

• Effective price: ₹1,705 per share

Result: Despite the ₹250 crash, you effectively sold at ₹1,705.

Also, if Price Rises: You sell the stock for more, but lose the extra profit on the futures, capping your proceeds at the original lower price.

2.SPECULATION – USING FUTURES FOR PROFIT

BULLISH VIEW: BUYING FUTURES (LONG)

When to use: You think a stock will rise and want bigger profits than just buying shares especially when comparing futures vs ETFs for short-term moves.

How it works:

Regular way: Pay ₹100 for one share. If it goes to ₹110, make ₹10 profit (10% return).

Futures way: Pay only ₹20 margin but control ₹100 worth of stock. If it goes to ₹110, make ₹10 profit on ₹20 invested (50% return!).

The catch: If it drops to ₹90, you lose 50% instead of 10%.

Example:

Setup:

• Stock at ₹1,298

• Futures at ₹1,300

• Target: ₹1,345

• Lot size: 850 shares

What you pay:

• Contract value: ₹11,05,000

• Margin (20%): ₹2,21,000

When price hits ₹1,345:

• Profit: ₹45 × 850 = ₹38,250

• Return: 17.69%

Key point: You controlled ₹11 lakh with just ₹2.21 lakh. When stock moved ₹45, you made 18% return.

Warning: If stock drops ₹45, you lose 18% too—leverage cuts both ways.

BEARISH VIEW: SELLING FUTURES (SHORT)

When to use: You think a stock will fall and want to profit without owning it.

How it works:

Regular way: You can't profit from falling stocks unless you own them first—complicated.

Futures way: Sell at ₹100 (paying ₹20 margin), buy back at ₹80. Pocket ₹20 difference (100% return!).

The catch: If stock rises to ₹120, you lose ₹20 on ₹20 (100% loss). Worse—stocks can rise forever, so losses are unlimited.

Example:

Setup:

• Bank stock futures at ₹1,602

• Expected fall to ₹1,525

• Lot: 550 shares

What you pay:

• Margin (20%): ₹1,76,220

What you do:

1. Sell futures at ₹1,602

2. Buy back at ₹1,525

When price falls:

• Profit: ₹77 × 550 = ₹41,250

• Return: 23.41%

Key point: Stock fell 4.7%, but you made 23.41% return.

Warning: If stock rises ₹77, you lose 23.41%—and losses can be unlimited. Always use stop-losses.

WHAT CAN GO WRONG? KEY RISKS

1. Daily Cash Settlement (MTM)

Every night, profits/losses settle in cash. Losing? Pay immediately or face forced exit at bad prices.

2. Leverage is Dangerous

A 5% wrong move can wipe out 25% of your margin. Most beginners lose money here.

3. Hidden Costs

Brokerage, STT, GST add up. F&O profits taxed at income tax rates—not lower capital gains rates.

FINAL THOUGHTS

Futures are tools—not magic. They protect you (shield) or boost profits (sword). But they multiply losses just as fast.

The truth: The market doesn't care about your feelings. A hammer can build a house or break a window. The tool doesn't decide—you do.

Starting out?

GoPocket tip: Practice with paper trading first. Start with one contract. Never risk rent money.

Survive first, profit later. The best traders aren't the smartest—they're the most disciplined.

Learn the basics. Respect the leverage. Trade smart. Be in control.

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