How to Calculate Profit in Futures Trading
In futures trading, traders can either buy or sell a commodity at a predetermined price in the future. These prices are determined by supply and demand and the market’s perception of risk. The profit in a trade is determined by the difference between the price at which you bought or sold and the prevailing market price. This is known as the spread.
futures trading is a popular investment choice for people who want to hedge against inflation or other risks. However, it is important to understand how P&L and margin requirements are calculated before you start trading. This will help you manage your risk effectively and increase your chances of success.
Depending on the type of futures contract you’re trading, your profits will differ. For example, in a bitcoin (BTC) futures contract, your profits will be determined by the number of BTC you’ve purchased or sold at the prevailing price. If you’re trading a stock or bond futures contract, your profits will be based on the change in the share price of that particular company.
How to Calculate Profit in Futures Trading
While you can get leverage in intraday trades, most brokers like Zerodha don’t offer leverage on non intraday positions. The reason behind this is that non intraday trading in futures has more risk involved than in stocks as the underlying asset is not cash-based and therefore, physical delivery doesn’t take place.
As such, the amount of margin required for a long or short position in a futures contract is much higher than that of an intraday position. This is because the financial market doesn’t expect to deliver the underlying asset at the end of the contract term, and it is expected that you will close your position before the end of the contract.
Aside from the margin required to open a position, the other big factor in futures P&L calculation is the actual price of the underlying asset. This is because there is a direct correlation between the price of the underlying asset and your futures P&L.
The main reason why people are drawn to futures trading is because of its ability to avoid the default risk, which is the counterparty default or failure to honor a contract. It is the obligation of the exchange to overcome this by charging a margin and running a P&L mark to market (M2M). However, this does not mean that there is no price risk, as the price of the underlying asset could still move. In addition, the risk is further magnified by the fact that futures contracts are standardized and can be traded on a worldwide basis. Consequently, the risk of losing an entire investment is very high.