There are several reasons traders prefer futures to their underlying. This week, we discuss the benefits of trading futures when you have a negative view on an underlying.

Trading efficiency

The first reason is obvious. Brokers do not typically allow retail traders to carry short stock positions overnight. A short position initiated during the day is typically closed by 3.15 pm to reduce risk. Note that SEBI regulation allows short positions in the underlying to carried over beyond a day through the securities lending and borrowing (SLB) mechanism. Suffice it to know that the procedure is tedious, and most traders may not prefer it. It is easier to short in the futures market. Why? In the spot market, you must deliver the underlying for the transaction to complete the next day (T+1). In the futures market, you are not required to deliver the asset till contract expiry. That means you can carry your short futures position and close it before expiry without being obligated to deliver the underlying. You are said to carry a naked short position. The ability to carry a naked short position saves you the borrowing cost that you will incur if you short the underlying. Note that the borrowing cost depends on the demand for the shares, especially, by the short sellers.

The second reason is related to taxes. Suppose you have a negative view on the underlying and want to initiate an intraday trade. You can short the stock and close the position by 3.15 pm. The gains on the position will be taxed at your marginal tax rate. But what if you have accumulated net losses on intraday trades at the end of a financial year? Intraday losses in the spot market are considered speculative income, and such income can only be carried forward for four years and setoff against speculative gains. Intraday losses on futures are treated as nonspeculative business income and can be carried forward for eight years and setoff against other business income. This offers a tax advantage to trade futures even through intraday shorting in the stock can be initiated without incurring additional transaction cost. Then, there is the leverage effect. You require lower trading capital to short overnight positions in the futures market compared to shorting the underlying, assuming you avail the SLB mechanism.

Optional Reading

Some may argue that the margin trading facility (MTF) in the spot market can offer similar benefits as leverage on futures. While MTF does offer leverage, it comes at a cost. These include interest cost (typically 0.04 per cent per day on the funded amount), pledge costs and brokerage commission. True, futures have costs too; futures price is typically greater than the spot market because of the interest factor. But if you were to compare the interest factor relating to futures with the cost of using the MTF in the spot market, the former is typically lower and easy to initiate.

The author offers training programmes for individuals to manage their personal investments

Published on June 13, 2026