Calculating Futures Contract Profit and Loss

In this blog, you will learn to calculate futures contract profit and loss. This works very differently from other asset classes. Calculating futures profit and loss (P & L) is simpler than calculating the profit and loss of other types of derivatives. The key thing that you should know about the futures market you trade is the point value; this is sometimes referred to as contract size or multiplier.

What is a Futures Contract?

In the stock market, a futures contract is a legal agreement to buy or sell something at a predefined price at a specified time in the future, between parties who do not know each other. The asset which is transacted is generally a commodity or financial instrument.

In futures trading, as in all trading and finance, it is important to understand that an unrealized profit or loss is no less real than if it is realized. The reality is that this is not a real loss until you close your position. This concept of valuing assets and liabilities at the last known price is known as mark to market. It is valid across the entire field of finance. It becomes a little more substantial when it comes to the future. With these specific instruments, the cash settlement is done every day at the closing of trading.

Consider a trader who takes a short position in the 50 e-mini future selling, to open one contract at 2900. The point value of this contract is 50, this means that for every rupee the market makes you gain or lose 50. On the same day the trader opened this position, the end-of-day closing price was 2890. This means that the price of this futures contract changed by 10. As point value is 50, so the change in value was then 500 (10 x 50). The price went down and the trader was short, so he now has an unrealized gain of 500. But here what is important at the end of the day is this amount of 500 will be added to his account. It will be transferred to him automatically and show up in the account statement.

The same trader held onto the position for another day and at the end of the second day, the Settlement price was 2950. What happens now, in his account open profit and loss have changed and need to be settled in cash. What matters here is the change in value since the last mark to the market settlement which was a day earlier. The price change was 2950-2890=60. Multiply it by 50 and you arrive at 3000. This amount will be automatically deducted from his cash account.

This procedure of daily mark to market settlements reduces risks for all involved parties rather than waiting for contracts to be Closed or for the last trading day. This daily settlement makes sure that all parties can meet their obligations.

Calculating Futures Contracts Profit and Loss

What is the basis of profit? Profit is to buy low and sell high. Any trade will have outcomes such that either it is a profit or a loss or a no profit no loss situation, these outcomes are known as the payoffs concerning a particular trade. When this outcome is plotted on a graph, we get a payoff chart. The payoff chart represents the price of an underlying on the X-axis and profit or loss on the Y-axis. When we join these outcomes, we get a graphical representation. The trade follows the basic fundamentals of buy low and sell high to make a profit. Let’s understand this with the example!

Mr. P was bullish and in the hope that the market will go up, he bought a futures contract of 1000 Rs. When the price of the futures contract is below 1000, it will be a loss position. At a price of 1000 Rs, there will be no profit no loss situation. Beyond 1000 Rs will be a profitable position as the selling price is higher than the purchase price. (see the Long Futures Payoff Chart).

Mr. P was bearish and of the view that the markets will go down, he has sold futures contracts at 1000 Rs. The selling price is 1000 Rs, at any point of time when the price of the contract is below 1000 Rs, Mr. P is in profit. At 1000 Rs there is no loss, no profit. The position is a loss at any price above 1000 Rs because the selling price is less than the purchase price. (see the Short Futures Payoff Chart).

Before we jump to the calculation part, first let us see some terms related to Futures Contract.

Current Value

The current value of the contract is calculated by multiplying the current price of an asset by the size of the contract.

Value of a One-Tick Move

The dollar value of a one-tick move is calculated by multiplying the tick size by the size of the contract.

Futures Contract Profit and Loss Calculation Formulae

Current Value of Contract = Current Price x Size of Contract

Profit/Loss Per Contract = Current Price - Buying Price

Value of Tick ($) = Tick Size x Size of Contract

No of ticks moved = Profit per Contract/Tick Size

Total Move ($) = No of ticks moved x Value of Tick

Total Profit/Loss of Future Contract = Total Move ($) x No of Contracts

For Example,

Size of One Future Contract = 1000

Buy Price = $53.60

Current Price = $54

Tick Size = $0.01

Current Value of Contract = ($54 x 1000) = $54000

Profit Per Contract = ($54 - $53.60) = $0.40

No of ticks moved = ($0.40 / $0.01) = 40

Value of Tick ($) = ($0.01 x 1000) = $10

Total Move ($) = 40 x $10 = $400

Total Profit = Total Move ($) x No of Contracts

Losses are calculated in the same manner as gains.

This is how the profit and loss calculations for futures contracts happen. Hope this blog has given you a complete understanding of calculating futures contract profit and loss.