What does the F&O obligation amount mean?
The F&O obligation amount is the net sum of money added or removed from your ledger on a given day for your futures and options positions. Options trades are settled on the basis of net premium receivable or payable. However, when you trade futures contracts, the obligation amount is calculated at a marked-to-market (M2M) price which means:
- If you have taken a futures trade and not closed it during the day - The difference between your trade price and the closing settlement price will be settled to your account.
- If your futures position was carried forward from yesterday and you continue to hold it - The difference between the previous day's and today's closing price will be settled to your account.
- If your futures position was carried forward from yesterday and you square it off - The difference between the previous day's closing and your square-off price will be settled to your account.
An illustration of the relation between the F&O obligation amount and your profit/loss:
You have purchased one lot (500 shares) of Reliance futures at Rs. 1400 on Monday but you did not square off your position. At the end of the day, the closing settlement price of Reliance futures is Rs. 1410. In this case, Rs. 5000 (i.e. 1410-1400 x 500 shares) reduced by applicable charges will be added to your ledger.
On Tuesday, you did not trade at all and your Reliance position continued to be carried forward. The closing settlement price of Reliance futures is Rs. 1405. In this case, Rs. 2500 (i.e. 1405-1410 x 500 shares) will be deducted from your ledger.
On Wednesday, you decided to sell Reliance at Rs. 1404. In this case, Rs. 500 (i.e. 1404-1405 x 500 shares) along with the transaction charges will be further reduced from your account.
Your profit for this trade is Rs. 1404 (selling price) - Rs. 1400 (buying price) which equals to Rs. 2000 (i.e. 4 x 500 shares). This will be equal to the sum of all credits and debits in your account for the Reliance trade since Monday (i.e. Rs. 5000 - Rs. 2500 - Rs. 500 = Rs. 2000). Accordingly, even though the M2M settlement takes place daily, your overall profits will always reconcile.
Note: We have ignored the effect of transaction charges in the above illustration.