How it unfolds, step by step
The setup
Contract Z is bought at ₹1,000 for 100 units. The chart below calls that the long side. Contract Z has its own quantity. NIFTY and BANKNIFTY quantities depend on their contract series. A lot size is the number of units in one contract. The real ones come from the exchange's contract specification for the series being traded. The position's value at entry is ₹1,00,000. The broker blocks ₹15,000 of margin against it, again as an illustration. Beside it sits a bought call on the same underlying. The underlying is the share or index a contract is written on. The call's strike is ₹1,000. A strike is the price at which the right can be used. Its premium is ₹30, which is ₹3,000 for the same 100 units.
What happens next
Expiry arrives and the settlement value is read off. At ₹1,020 the futures position is ₹2,000 ahead. The call is worth ₹20 there. A right to buy at ₹1,000 when the settlement value is ₹1,020 is worth the ₹20 difference. It cost ₹30 to gain ₹20, so the call is ₹1,000 behind on 100 units. At ₹900 the futures position is ₹10,000 behind. The call has lost the ₹3,000 it cost, and no more. The two lines on the chart never meet at any settlement value. They are not two prices of the same exposure.
What it means — and does not
Read the chart as two shapes, not two numbers. The futures line is straight and runs through zero. The obligation goes the same distance in both directions. The ₹15,000 blocked as margin appears nowhere on it. Margin is a deposit held against performance. So a move against the position is settled in cash as it happens, and more can be called for than was blocked at entry. The call line is bent. Below the strike it flattens at minus ₹3,000, because the right was not used. Above the strike it climbs in parallel with the futures line, but ₹3,000 lower, for ever, because the premium was already spent. That bend is the only thing a buyer gets for the premium, and it is paid for rather than free. What the premium is made of, and where it sits against the strike, are the next two lessons: /learn/option-premium-intrinsic-and-time-value and /learn/moneyness-itm-atm-otm. How far the underlying has to move before the bend pays for itself is /learn/options-breakeven-the-move-you-need.
- Long futures, gross result at expiry (₹)
- Bought ₹1,000 call, gross result at expiry (₹)
- Neither ahead nor behind · 0
- Premium paid ₹3,000 · -3,000
A long futures position and a bought ₹1,000 call, both on 100 units, at a range of expiry settlement values. The futures line is straight through zero. The call line flattens at the premium paid and never catches up above the strike. Gross of charges.
Show the underlying data
| Settlement value at expiry (₹) | Long futures, gross result at expiry (₹) | Bought ₹1,000 call, gross result at expiry (₹) |
|---|---|---|
| 900 | -10,000 | -3,000 |
| 940 | -6,000 | -3,000 |
| 980 | -2,000 | -3,000 |
| 1000 | 0 | -3,000 |
| 1020 | 2,000 | -1,000 |
| 1030 | 3,000 | 0 |
| 1060 | 6,000 | 3,000 |
| 1080 | 8,000 | 5,000 |
| 1120 | 12,000 | 9,000 |
What this does not establish
The reading here is obligation on one side, right on the other. It is refuted in exactly one place, and it is the place beginners are pointed at most often. That place is the premium read as a full statement of risk. It holds for a standalone bought option, on the option payoff, before charges. It is false for a SELLER. A seller's premium is the most that can be received, and it says nothing at all about what can be owed. A sold call's obligation has no ceiling in the contract. That is why it is margined like a futures position, rather than paid for like a bought one. The reading is also incomplete for a bought contract carried into a physically settled . There, using the right creates obligations to deliver the shares themselves, or to pay for them, and the premium never described those. People carrying a futures position conventionally anchor a stop-loss to a level in the contract price, because the contract gives no floor of its own. And a stop-loss is an intention to close. It is not a promise about the price at which it closes.
Things to check
5Which side is being described — the one holding the right, or the one holding the obligation?
Is the number quoted the position's value, the margin blocked, or the premium paid? Those answer three different questions.
For a sold option, what is owed if the underlying keeps going? The premium received does not answer that.
Does the contract settle in cash, or in the shares themselves? The second creates obligations at expiry that the first does not.
Compare the futures obligation with the bought option's premium and payoff.
Common mistakes
4Reading blocked margin as the worst case. It is a deposit against performance. The exposure is the position's value. A move against the position is settled in cash as it happens, and that can call for more.
Quoting the premium as “the most that can be lost” without the conditions attached: for a bought option, on the option payoff, before charges. Not one of them applies to a seller.
Treating a bought call as a cheaper futures position. The premium buys a right that expires, and it is spent whether the move arrives or not.
Comparing the two on direction alone. Time, volatility and the way settlement works act on one of them and not the other.
₹15,000 of margin is blocked against a ₹1,00,000 futures position. What does the ₹15,000 measure?
- The most the position can cost
- What the contract cost to enter
- A deposit held against performance of the contract, which can be called on for more while the position is open
Show the answer
C. A deposit held against performance of the contract, which can be called on for more while the position is open
Margin is a deposit. It is not a price, and it is not a ceiling. The exposure is the position's value. Moves against it are settled in cash as they happen, and the amount at stake can go past what was blocked at entry. Reading it as a worst case is what makes a futures position look like a bought option, which is the one thing it is not.
Frequently asked
3Is margin the price of a futures contract?
No. The price is the contract price. The position's value is that price times the contract quantity. Margin is a deposit held against performance of the contract. ₹15,000 blocked against a ₹1,00,000 position is not the cost of the position, and not a ceiling on what it can cost. Further cash can be called for while it is open.
Does a rising underlying guarantee that a call buyer gains?
No. The premium has to be won back before the position is level. Time and volatility act on the premium as well as direction. /learn/options-breakeven-the-move-you-need works out how far the move has to go. /learn/options-theta-expiry-trap works out what is given up while waiting for it.
Are 100 units and ₹1,000 real NIFTY or BANKNIFTY figures?
No. Contract Z has its own quantity. It does not give the current lot size for NIFTY or BANKNIFTY. Real contract quantities come from the exchange's specification for the series being traded, and they are revised from time to time. So they are looked up, never remembered from an example.