FUTURE PAYOFFS
Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for the buyer and the seller of futures contract are unlimited. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs share tips.
PAYOFF FOR BUYER OF FUTURES: LONG FUTURES
The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who buys a two month Nifty index futures contract when the Nifty stands at 2220. The underlying asset in this case is the Nifty portfolio. When the index moves up, the long futures position starts making profits, and when the index moves down it starts making losses.
PAYUFF FUR SELLERS UF FUTURES: SHORTFUTURES
The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two month nifty future contract when the Nifty stands at 2220. The underlying asset in this case is the Nifty portfolio. When the index moves down, the sort futures position starts making profits, and when the index moves up, it starts making losses.
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