Pay off on a position is the likely profit/ loss at expiry, that would accrue to a market participant with change in the price of the underlying asset. The pay-off diagram of a financial derivative contract like futures is graphical representation showing the price of the underlying asset on the X-axis and profits on the upper Y-axis and losses on the lower Y-axis.

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# Chapter 6

# Payoff of Futures

## Long Futures/ Buy Futures

Let’s assume Nifty Futures are bought at Rs 17703 per lot (lot size = 50), the payoff profile of futures contract is indicated ahead. It results in unlimited losses if the underlying slips lower and unlimited profits, if Nifty (underlying) were to gain.

A desire to look at pay-off profiles of futures, buy position, Quantsapp is a leading derivatives analytic platform for enabling traders to study payoff profiles of their strategies in futures and options.

## Short Futures position / Sell Futures position

While the seller of Nifty futures at Rs 17,701 is highlighted ahead with the help of Quantsapp option architect tool, which helps traders to study payoff profiles of futures & options on NSE.

The sell/short position in Nifty futures results in potential of unlimited profits when Nifty falls and unlimited losses, when price gains in Nifty are observed.

In forward/futures contract, there is a “promise” to buy/sell the underlying and has a linear pay off, which indicates unlimited losses and profits. Some market participants desire to ride upside and restrict the losses and this leads to financial subject of options.

### FAQs

**What is payoff in Derivatives?**

The payoff at expiration or otherwise is the rupee amount, the investor receives from following a particular derivative strategy. It is the graphical representation of profit and loss which the derivative strategy entails, on varying values of the underlying like Nifty or F&O listed stocks.

**How is** futures **payoff calculated?**

The payoff is the Profit and Loss diagram, which suggests the P&L for varying prices of underlying, like Nifty or Banknifty being the indices and F&O categorized stocks.

In futures, the trader can participate by buying futures initially, in which case, the profit and loss is the difference between the price at which the futures were sold and the price at which the futures were initially bought.

In case of selling futures initially also, the profit and loss is the difference between the prices at which sell transaction occurred and followed by a buy transaction, later.

**What is short futures position?**

Short futures position is also called sell futures position. In derivatives market, the trader doesn’t need to have a physical exposure to the underlying, to be able to sell the derivative/futures contract.

**What are the margins in futures position?**

In derivatives market, the trader doesn’t need to have a physical exposure to the underlying, to be able to sell the derivative/futures contract. The requirements of initial margin need to be met and also, MTM margin calls need to be honoured appropriately, when participating in futures contract, irrespective, whether on sell side or on buy side.