60

Short Futures Payoff

40

20
Profit/Loss (Rs.)

0
50 60 70 80 90 100 110 120 130 140 150

CMP @ Expiry

-20

-40

Short Futures Payoff

-60

As can be seen, a short futures position makes profits when prices fall. If prices fall to Rs 60
at expiry, the person who has shorted at Rs 100 will buy from the market at Rs 60 on expiry
and sell at 100, thereby making a profit of Rs 40. The lower the price of the underlying (i.e.,
the spot price) at expiry, the higher the profit made by the seller of the futures contract.
Short position in futures means selling a futures contract in anticipation of decrease in the
price before the expiry of the contract. If the price of the futures contract decreases before
the expiry of the contract, then the trader makes a profit by squaring off the position and if
the price of the futures contract increases, then the trader incurs a loss. Short speculators are
those who expect the price to fall and therefore sell futures contracts.

3.9 Tick Size and its impact

Tick size is the minimum price movement in terms of change in price or change in quotation
for order. It is in Rupees terms. If, as per the contract specification, the price of a commodity
is allowed to move from Rs.100 to Rs.100.10 or to Rs.99.90 (but not to prices in between like
Rs.100.05, or Rs.100.03, or Rs.99.95, or Rs.99.92, etc.), it means tick size for this commodity
is fixed as Rs.0.10 (i.e., 10 Paisa).
The tick size for commodity derivatives differs from one commodity to another. The impact
of change in price by one tick plays a significant role in entry and exit decisions for market
participants. Hence it is important to understand the profit and loss arising out of one tick
change on client’s portfolio which is called as “tick value”.

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