How derivative contract’s position is uploaded in the trading system

Futures and Options markets are part of the bigger derivatives market and Flattrade will explain its customers how positions related to Futures and Options contracts are uploaded in the trading terminal.

Futures or Option contract’s values are determined on mark-to-market method based on closing price of a security by the exchange and settled on the next day.

Mark-to-Market is an accounting procedure to determine the fair value of Future or Options contracts which can fluctuate due to various market conditions.

So, all open positions of Futures contracts are booked in the back office based on closing price which is provided by the exchange and the Futures contracts are settled.

In Options contract, when a trader buys an Options contract, then the premium amount for that buy position is debited in the ledger. When a trader sells an Option contract, then the premium for that sell position is credited in the ledger along with the required margin of the sale of option contracts.

Hence, the F&O positions for the next day are uploaded in the trading system based on the closing price of the previous day. So the clients can see only the previous day’s closing price and not the initial or actual buying price on the next day.

For further clarity, we will look at a couple of examples

Example 1

You as a trader buy one lot of BHEL at Rs 61 per share during the first day (Day 1). One lot has 10,500 shares. You decide to carry forward your position to the next day, while the closing price of the contract rises to Rs 62. So, you have made a profit of Re 1 (Rs 62 minus Rs 61) at the end of Day 1. Since 1 lot has 10,500 shares, you have made a total profit of Rs 10,500 (Re 1 * 10,500)

On Day 2, when the position is uploaded in the trading terminal, it is uploaded as per the closing price of Day 1 which is Rs 62. The intraday mark-to-market’s profit or loss is calculated based on the previous day’s closing price. You will see the average buy price as Rs 62 (Day 1’s closing price) and not your initial buy price of Rs 61.

Example 2

You buy one lot of BHEL 60 CE (Call Option) at 50 paise and you have paid a premium of Rs 5250. This Rs 5250 is calculated as follows: 1 lot has 10500 shares. 10500 * 50 paise is Rs 5250, which is the premium amount. This position taken by you is carry forwarded to the next trading day, while the contract’s price rises to 60 paise at close. Now, back office system will show the premium amount of Rs 5250 as debited and the same will be settled with the exchange on the next day. You have made a profit of Rs 1050 (10500 * 10 paise) at the end of Day 1.

On Day 2, the trading system will show 60 paise as the average buy rate. During the day, the price rises to 70 paise and the contract is sold at 70 paise and the position is squared off. So you have made a profit of another Rs 1050 on Day 2. So a total of Rs 7,350 (Rs 5250 + Rs 2100) is credited to your ledger on Day 2.

In case the price falls down to 40 paise on Day 2 from previou’s Days closing price of 60 paise, and if you close the position, then the trading system will show a loss of 20 paise. The trading terminal will show that you had incurred a loss of Rs 2100 on Day 2.

But actual loss of this contract is 10 paise from the original buy price of 50 paise. Then the actual loss is only Rs 1050 for you.