Basics of futures and options trading in india Enriching Investors Since 1998. Profitable Trading Solutions for the Intelligent Investor. Beginners Guide to Options. What is an option? An option is a contract giving the buyer the right, but not the obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date. An option is a derivative. That is, its value is derived from something else. In the case of a stock option, its value is based on the underlying stock (equity). In the case of an index option, its value is based on the underlying index (equity). · Listed Options are securities, just like stocks. · Options trade like stocks, with buyers making bids and sellers making offers.
· Options are actively traded in a listed market, just like stocks. They can be bought and sold just like any other security. · Options are derivatives, unlike stocks (i. e, options derive their value from something else, the underlying security). · Options have expiration dates, while stocks do not. · There is not a fixed number of options, as there are with stock shares available. · Stockowners have a share of the company, with voting and dividend rights. Options convey no such rights. Some people remain puzzled by options. The truth is that most people have been using options for some time, because option-ality is built into everything from mortgages to auto insurance. In the listed options world, however, their existence is much more clear. Types Of Expiration. There are two different types of options with respect to expiration. There is a European style option and an American style option. The European style option cannot be exercised until the expiration date.
Once an investor has purchased the option, it must be held until expiration. An American style option can be exercised at any time after it is purchased. Today, most stock options which are traded are American style options. And many index options are American style. However, there are many index options which are European style options. An investor should be aware of this when considering the purchase of an index option. An option Premium is the price of the option. It is the price you pay to purchase the option. For example, an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.2. The Strike (or Exercise) Price is the price at which the underlying security (in this case, XYZ) can be bought or sold as specified in the option contract. The Expiration Date is the day on which the option is no longer valid and ceases to exist.
The expiration date for all listed stock options in the U. S. is the third Friday of the month (except when it falls on a holiday, in which case it is on Thursday). People who buy options have a Right, and that is the right to Exercise. When an option holder chooses to exercise an option, a process begins to find a writer who is short the same kind of option (i. e., class, strike price and option type). Once found, that writer may be Assigned. There are two types of options - call and put. A call gives the buyer the right, but not the obligation, to buy the underlying instrument. A put gives the buyer the right, but not the obligation, to sell the underlying instrument. The predetermined price upon which the buyer and the seller of an option have agreed is the strike price, also called the exercise price or the striking price. Each option on a underlying instrument shall have multiple strike prices. Call option - underlying instrument price is higher than the strike price. Put option - underlying instrument price is lower than the strike price. Call option - underlying instrument price is lower than the strike price. Put option - underlying instrument price is higher than the strike price. The underlying price is equivalent to the strike price.
Options have finite lives. The expiration day of the option is the last day that the option owner can exercise the option. American options can be exercised any time before the expiration date at the owner's discretion. A class of options is all the puts and calls on a particular underlying instrument. The something that an option gives a person the right to buy or sell is the underlying instrument. In case of index options, the underlying shall be an index like the Sensitive index (Sensex) or S&P CNX NIFTY or individual stocks. An option can be liquidated in three ways A closing buy or sell, abandonment and exercising. Buying and selling of options are the most common methods of liquidation. An option gives the right to buy or sell a underlying instrument at a set price. Options prices are set by the negotiations between buyers and sellers. Prices of options are influenced mainly by the expectations of future prices of the buyers and sellers and the relationship of the option's price with the price of the instrument. The time value of an option is the amount that the premium exceeds the intrinsic value. Time value = Option premium - intrinsic value.
Long Term Investing. Multiply your capital by investing. long term trends. Multi Bagger Stocks. Create wealth for yourself. quickly identifying changes in trends, riding the trend. booking profits at the end of the trend. Capture brief price swings. fast moving trending stocks. intra-day price volatility of the most active stocks in both.
BULLISH & BEARISH Markets. generate a steady stream of daily income. Futures Day Trading. maximum profits everyday. highly liquid futures contract. • Use of this website andor products & services offered by us indicates your acceptance of our disclaimer. • Disclaimer: Futures, option & stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia. com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. • All names or products mentioned are trademarks or registered trademarks of their respective owners.
Futures Trading Basics. A futures contract is a standardized contract that calls for the delivery of a specific quantity of a specific product at some time in the future at a predetermined price. Futures contracts are derivative instruments very similar to forward contracts but they differ in some aspects. Futures contracts are traded in futures exchanges worldwide and covers a wide range of commodities such as agriculture produce, livestock, energy, metals and financial products such as market indices, interest rates and currencies. The primary purpose of the futures market is to allow those who wish to manage price risk (the hedgers) to transfer that risk to those who are willing to take that risk (the speculators) in return for an opportunity to profit. Producers and manufacturers can make use of the futures market to hedge the price risk of commodities that they need to purchase or sell in order to protect their profit margins. Businesses employ a long hedge to lock in the price of a raw material that they wish to purchase some time in the future. To lock in a selling price for a product to be sold in the future, a short hedge is used. Speculators assume the price risk that hedgers try to avoid in return for a possibility of profits. They have no commercial interest in the underlying commodities and are motivated purely by the potential for profits.
Although this makes them appear to be mere gamblers, speculators do play an important role in the futures market. Without speculators bridging the gap between buyers and sellers with a commercial interest, the market will be less fluid, less efficient and more volatile. Futures speculators take up a long futures position when they believe that the price of the underlying will rise. They take up a short futures position when they believe that the price of the underlying will fall. Example of a Futures Trade. In March, a speculator bullish on soybeans purchased one May Soybeans futures at $9.60 per bushel. Each Soybeans futures contract represents 5000 bushels and requires an initial margin of $3500. To open the futures position, $3500 is debited from his trading account and held by the exchange clearinghouse. Come May, the price of soybeans has gone up to $10 per bushel. Since the price has gone up by $0.40 per bushel, the speculator can exit his futures position with a profit of $0.40 x 5000 bushels = $2000. Continue Reading.
Buying Straddles into Earnings. Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. Read on. Writing Puts to Purchase Stocks. If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. Read on. What are Binary Options and How to Trade Them? Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. Read on. Investing in Growth Stocks using LEAPSÂ® options. If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®. Read on. Effect of Dividends on Option Pricing. Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. Read on. Bull Call Spread: An Alternative to the Covered Call.
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call method, the alternative. Read on. Dividend Capture using Covered Calls. Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. Read on. Leverage using Calls, Not Margin Calls. To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. Read on. Day Trading using Options. Day trading options can be a successful, profitable method but there are a couple of things you need to know before you use start using options for day trading. Read on. What is the Put Call Ratio and How to Use It. Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. Read on. Understanding Put-Call Parity. Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969.
It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. Read on. Understanding the Greeks. In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as "the greeks". Read on. Valuing Common Stock using Discounted Cash Flow Analysis. Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. Read on. Follow Us on Facebook to Get Daily Strategies & Tips! Futures Options. Metal Futures. Softs Futures. Options method Finder.
Risk Warning: Stocks, futures and binary options trading discussed on this website can be considered High-Risk Trading Operations and their execution can be very risky and may result in significant losses or even in a total loss of all funds on your account. You should not risk more than you afford to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Information on this website is provided strictly for informational and educational purposes only and is not intended as a trading recommendation service. TheOptionsGuide. com shall not be liable for any errors, omissions, or delays in the content, or for any actions taken in reliance thereon. The financial products offered by the company carry a high level of risk and can result in the loss of all your funds. You should never invest money that you cannot afford to lose. Futures Options Trading. Futures Options Trading 101 is available free to help both experienced and beginning futures market traders. You may also register free to receive our special advanced options trading info: 'Options on Futures'.
Futures Options Trading First Steps: 100% of Futures Options lose all their 'time value'. When Futures Options expire, they are worthless. Most of the time, Futures Markets have no trend. Cannon Trading respects your privacy, all transactions are safe and secure with High-grade Encryption (AES-256, 256-bit keys) . We do not sell your information to third parties. 1. Bullish Market Strategies. 2. Bearish Market Strategies. 3. Neutral Market Strategies. Futures Options Writing. Have you ever wondered who sells the futures options that most people buy? These people are known as the option writerssellers. Their sole objective is to collect the premium paid by the option buyer. Option writing can also be used for hedging purposes and reducing risk. An option writer has the exact opposite to gain as the option buyer.
The writer has unlimited risk and a limited profit potential, which is the premium of the option minus commissions. When writing naked futures options your risk is unlimited, without the use of stops. This is why we recommend exiting positions once a market trades through an area you perceived as strong support or resistance. So why would anyone want to write an option? Here are a few reasons: Most futures options expire worthless and out of the money. Therefore, the option writer is collecting the premium the option buyer paid. There are three ways to win as an option writer. A market can go in the direction you thought, it can trade sideways and in a channel, or it can even go slowly against you but not through your strike price. The advantage is time decay. The writer believes the futures contract will not reach a certain strike price by the expiration date of the option. This is known as naked option selling. To hedge against a futures position.
For example: someone who goes long cocoa at 850 can write a 900 strike price call option with about one month of time until option expiration. This allows you to collect the premium of the call option if cocoa settles below 900, based on option expiration. It also allows you to make a profit on the actual futures contract between 851 and 900. This method also lowers your margin on the trade and should cocoa continue lower to 800, you at least collect some premium on the option you wrote. Risk lies if cocoa continues to decline because you only collect a certain amount of premium and the futures contract has unlimited risk the lower it goes. Click play to watch video on Buying Options on Futures Contracts - A Guide to Uses and Risks. Cannon Trading Company Inc. believes in writing options on futures , but advises against doing it without the advice and expertise of a knowledgeable broker or specialist. Be strict when choosing which futures options to write and don't believe in writing options on futures as your only method. Using the same method every month on a single market is bound to burn you one month, because you end up writing options on futures when you shouldn't. Cannon Trading Co. Inc. believes you should treat option writing just like futures trading. We believe you should stay with the major trend when writing futures options, with rare exceptions. Use market pullbacks to support or resistance as opportunities to enter with the trend, by writing futures options which best fit into your objectives. Volatility is another important factor when determining which options on futures to write, it's generally better to sell over valued futures options then under valued futures options.
Remember not to get caught up with only volatility, because options on futures with high volatility could always get higher. The bottom line is, pick the general market direction to become successful over the long-term. We also believe in using stops based on futures settlements, not based on the value of the option. If a market settles above or below an area you believed it shouldn't and the trend appears to have reversed based on the charts, it's probably a good time to exit your positions. We can help you understand the risks and rewards involved, as well as how to react to certain situations, i. e. ifthen trading scenarios. We can either assist your option writing style or recommend trades and strategies we believe are appropriate, using the above guidelines. Option Buying & Spreads. Most futures options expire worthless and out of the money, therefore most people lose when buying options on futures. Cannon Trading believes there is still opportunity in buying , but you must be very patient and selective. We believe buying futures options just because a market is extremely high or low, known as "fishing for options" is a big mistake. Refer to the guidelines on our "Trading Commandments" before purchasing any futures options.
Historic volatility, technical analysis, the trend and all other significant factors should all be analyzed to increase your probability of profit. All full-service accounts will receive these studies, opinions and recommendations upon request. Cannon Trading Company's "Trading Commandments" can be used as a guideline to assist you in the process and decision making of selecting the right market and futures options to purchase. A common method we implement involves the writing and buying of futures options at the same time, known as bull call or bear put spreads. Ratio and calendar spreads are also used and are recommended at times. Please do not hesitate to call for help with any of these strategies or explanations. Here are a few examples we use often: If coffee is trading at 84, we can buy 1 coffee 100 call and write 2 135 calls with the same expiration dates and 30 days of time until expiration. This would be in anticipation of coffee trending higher, but not above 135 in 30 days. We'd be collecting the same amount of premium as we're buying, so even if coffee continued lower we'd lose nothing. Our highest profit would be attained at 135 based on options on futures expiration. To determine risk we'd take the difference between 135 and 100, which is 35 points and divide it by two, because we sold two calls for every one purchased. You'd then add the 17.5 points to 135 and this would give you the approximate break-even point based on option expiration. Risk lies if coffee rises dramatically or settles over 152.50, based on expiration. A typical calendar spread method we use often would be to write 1 option with about 25 days left until expiration and buy 1 with 60 days left.
Example: If coffee was trading at 84 and we thought prices might be heading slowly higher. We can write 1 130 coffee call with less time and buy 1 coffee 130 call with more time in the anticipation that the market will trend higher, but not above the 130 strike before the first options on futures expiration. Some additional risk here lies in the difference between the two contract months. The objective is, if coffee trades higher over the next month but not above the 130 strike price, we'd collect the premium of the option we sold by letting it expire worthless. In addition, the option we purchased may also profit if coffee rises higher, but it may lose some value due to time decay if coffee doesn't rally enough. *Note: Some futures options trade based on different futures contract months and should always be considered in your trading. Don't hesitate to call for help with any of these strategies or explanations. Remember, the key is still going to be picking the general market direction correct. Therefore, you must analyze and study each market situation with several different trading scenarios and determine which one best suits your risk parameters. The art of trading these strategies is deciding when, where, which futures markets, and what ranges to use. If you are an inexperienced options trader use these strategies through the broker assisted program.
For more information, check out our Online Trading Futures Market Glossary. The material contained in 'Futures Options Trading 101' is of opinion only and does not guarantee any profit. These are risky markets and only risk capital should be used. Past results are not necessarily indicative of future results. Consult with a Cannon Commodity Trading Executive. Services Why Cannon Trading? Self-Directed Online Traders Broker-Assisted Traders Futures Trading Systems Managed Accounts & Algo Trading International Traders Foreign Introducing Brokers Software E-Futures International TransAct AT CQG Trader Trade Navigator MetaTrader 4 FireTip (Mac Compatible) MultiCharts OptionVue iBroker Tools Support & Resistance Levels Intraday Trading Signals Live S&P Pit Audio Premium Charts Daily Research Contract Specifications Order Types Community Weekly Newsletter FAQ Exchanges Company About Contact Wiring Instructions Careers President's Letter. RISK DISCLOSURE: Past results are not necessarily indicative of future results. The risk of loss in futures trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition. Basics of futures and options trading in india Basic Rules for Futures Traders.
Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don't change during the session unless you have a very good reason. Short Term Trading. Short term trading will help you catch Short Term Explosive Moves of Indian Stock and Index Futures in both BULL and BEAR markets! Day Trading is a process of capturing Intra-Day Volatility in highly liquid Stock and Index Futures! Capture short-term trends in Commodity Futures traded on both the NCDEX and MCX Commodity Futures Exchanges. Use of this website andor services offered by us indicates your acceptance of our disclaimer. Disclaimer: Futures, option & stock trading is a high risk activity.
Any action you choose to take in the markets is totally your own responsibility. TradingPicks. com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned. All names or products mentioned are trademarks or registered trademarks of their respective owners. Trading In Futures And Options Tutorial. future and option trading tutorial in yvilopup web. Trading In Futures And Options Tutorial. trading in futures and options tutorial ibiyusomiser web, futures and options trading tutorials windows munasenoba, basics of futures and options trading arebapinuho web, trading in futures and options tutorial ibiyusomiser web, basics of futures and options trading in india escola, futures and options trading tutorial india , future and options trading tutorial bayevuriluti web fc2, future and option trading tutorial in yvilopup web, options and futures trading basics ysifopukaqow web fc2, future option trading basics yzyjifoh web fc2, basics of options trading explained with exles, futures and options trading basics upemopilupuf web fc2, futures options trading tutorial harmony nannies, futures and options trading basics upemopilupuf web fc2, learn option trading in india basics, future and option trading in india tutorial igotiyycixoq, wheat and grains futures and options trading tutorial, future and options trading tutorial india zufabodoryteb, tutorial on futures and options trading, future and option trading tutorial in yvilopup web. Basics of futures and options trading in india In an online chat with Get Ahead readers on October 9 Nithin Kamath, CEO, Zerodha.
com answered readers' queries on how to trade in futures and options. Here is the unedited chat transcript. kaushal : What are the conditions imposed by SEBI for brokerages to start offering F&O services? Nithin Kamath : SEBI does a rigorous check on background of promoters, networth requirement, market knowledge of the management, technology and risk management systems before allowing a brokerage to offer f&o, along with this there is continuous audits done by the exchanges to ensure that everything is in place. ulfat : Who should ideally trade in futures & options segment? Nithin Kamath : Futures and options requires some commitment in terms of time to learn how to trade and then tracking your trades once you have taken them. If you are a positional trader, then I guess a person who can commit atleast a couple of hours everyday. Also, the business involves leverage and can be an emotional roller coaster, so a person who can handle that volatility. alex : Which books did you read to become an expert? What role does experience play in becoming a great F&O trader?
Nithin Kamath : Best books to get started with are those which talk about the good habits of profitalble traders as mentioned below. But once you are done with that, it is self discovery in reading and researching on what method best suits u. Yep, experience is the key, important thing is to learn from your experience and not make the same mistake twice. Jeswal : How can I become an expert in F&O trading. Nithin Kamath : f&o trading or trading in general requires a lot of time effort and dedication. The only way to learn trading is by actually putting up your money, only then will what you read make sense. But it also important that the money you put is something you can afford to lose. As I said earlier, try reading about what most profitable traders in the world did right in the book Market Wizards. kapadia : premium for which strike prices have high implied volatility? What does it imply and how to make money using this high implied volatility? Nithin Kamath : Usually out of the money options have a higher IV, the trade typically could be if it is much above the mean IV, it could be a good time to sell them and much below the mean time to buy.
Tharun : If i sell a call on starting of month ex.18 rs-, when it reaches to zero on expiry, so i get profit of 18 rs? How can i calculate margin required for writing a option? Nithin Kamath : We provide a tool called SPAN calculator, zerodha. comz-connectblogviewspan-calculator this allows you to calculate. We will be soon providing a similar tool on our website which can be used by everyone. vinod gatta : what is the average oscillation range of IV in nifty option? how can we use of it by analyzing? Nithin Kamath : Don't have the exact numbers but the range is between 10 to 40, at the lower end better to buy options and at the higher end to write them hoping that it will revert to the mean. sudaram : What is historical or statistical volatility? How does it affect pricing of futures and options? Nithin Kamath : Historical volatility is simply historical volatility in the price of the underlying. Volatility affects options more than the futures, higher volatility usually would mean option would be priced higher. John : Are Indian F&O mkts deep enough? there are no calll writing and put writing for next month or 3-month F&Os. Nithin Kamath : Yes liquidity is pretty bad if you go for anything other than present month.
Also the activity in stock options is really low. jitesh : How shall one trade in the F&O of index heavyweights on the expiry day? Nithin Kamath : There is no preset method to trade on expiry day, all you have to be careful is about not letting your in the money options expire (you rather sell it on the exchange rather than holding it till the close of trading on the expiry day. The reason for this is because the STT on expired options which are in the money goes up significantly. omi : How does a call writer and put writer make money? Nithin Kamath : call writer makes money when the markets don't go up above a certain point and put writer if market doesn't go down below a certain point. rajat : plz enlighten us on 5 must-dos and don'ts while trading in F&O. Nithin Kamath : The most important rule while trading f&o is to be very conservative, since there is a risk of losing money fast, risk only that which you can afford to lose, ideally should not exceed more than 15 to 20% of your investible capital. bhanu : what is implied volatility mean? How can I calculate it? Gadgets-Gaming : Tell me what are the risks associated with F&O and risks with day-trading in stocks? Nithin Kamath : Risks associated are the same, since you are trading with leverage, i. e more money than what you have in your account, the risk of losing money fast if your trade is not right. shaishav : Is it advisable to buy calls and puts or sell them? Nithin Kamath : It is advisable for a beginner trader to start off buying options rather than writingselling them. Once you get a hang of how the business works, you can look at writingselling them as well.
shinde : How can I make profits on results day. A lot of benchmark stocks will be announcing their results starting october 11. Nithin Kamath : As mentioned in Anil's query earlier, buying both calls and puts is the best bet when expecting volatility in the markets. mustafa : How is trading in futures & options differennt from trading in stocks? What makes more money? Nithin Kamath : Trading in f&O basically lets you get over the basic limitations of trading stocks. 1. it can be used to hedge, similar to insurance policy for your portfolio 2. Speculate, while trading stocks if you feel stockmarket is going down, you can sell and buy back only for intraday, whereas in f&O you can run this position upto 3 months. Also while trading stocks if you want to buy for more than what money you have, there is an interest to worry about, but not in case of f&o. vishal : What are the kind of money one can make in F&O? What are the risks attached? Nithin Kamath : Since when trading on f&O, you get a leverage, the profits you can make also gets multiplied. But leverage is a double edged sword, so the risk also goes up quite a bit. salim : I have heard about straddles and strangles in F&O. But how do they help me make profits?
What are the risks associated with such strategies? Nithin Kamath : Straddles and strangles are option strategies that you can take when instead of direction of the markets, you are betting on the volatility. Safer than naked options trading because your risk is hedged. shirish : I want to trade in stocks and also F&O. Which are the best books to read? Nithin Kamath : The best way to start off trading markets is by knowing what the profitable traders do, so in that context Market Wizards by Jack Schwager is a good way to start. FAQs: Futures and Options trading in India. WITH the exit of badla from the coming month, the stockmarket will see the introduction of options and futures in a big way. For investors who have difficulty in understanding the terminologies associated with options and futures as well as its modes of working, here's some lucid explanation. An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date). Underlying - The specific security asset on which an options contract is based. When the holder of an option exercises his right to buy sell, a randomly selected option seller is assigned the obligation to honor the underlying contract, and this process is termed as Assignment. An American style option is the one which can be exercised by the buyer on or before the expiration date, i. e. anytime between the day of purchase of the option and the day of its expiry. A call option gives the holder (buyer one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.
A Put option gives the holder (buyer one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date. A call option position that is covered by an opposite position in the underlying instrument (for example shares, commodities etc), is called a covered call. The intrinsic value of an option is defined as the amount by which an option is in-the-money, or the immediate exercise value of the option when the underlying position is marked-to-market. Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative. There are two types of factors that affect the value of the option premium: The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the earlier mentioned influencing factors. Options Premium is not fixed by the Exchange. The fair value theoretical price of an option can be known with the help of pricing models and then depending on market conditions the price is determined by competitive bids and offers in the trading environment. The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc.
The option Greeks are the tools that measure the sensitivity of the option price to the above mentioned factors. An option calculator is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying and its volatility, time to expiry, risk free interest rate etc. Developmental institutions, Mutual Funds, FIs, FIIs, Brokers, Retail Participants are the likely players in the Options Market. Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one's investment method dictates. High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value. If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity. Option is a contract which has a market value like any other tradable commodity. Once an option is bought there are following alternatives that an option holder has: The risk loss of an option buyer is limited to the premium that he has paid. The risk of an Options Writer is unlimited where his gains are limited to the Premiums earned. When a physical delivery uncovered call is exercised upon, the writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call. Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements.
The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options futures and other correlated markets. In the Indian Derivatives market, Sebi has not created any particular category of options writers. Any market participant can write options. However, margin requirements are stringent for options writers. The Stock Index Options are options where the underlying asset is a Stock Index for e. g. Options on S&P 500 Index Options on BSE Sensex etc. Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary. Index Options are effective enough to appeal to a broad spectrum of users, from conservative investors to more aggressive stock market traders. Options contracts where the underlying asset is an equity stock, are termed as Options on stocks. They are mostly American style options cash settled or settled by physical delivery. Options can offer an investor the flexibility one needs for countless investment situations.
An investor can create hedging position or an entirely speculative one, through various strategies that reflect his tolerance for risk. The equity options traded on exchange are not issued by the companies underlying them. Companies do not have any say in selection of underlying equity for options. Holder of the equity options contracts do not have any of the rights that owners of equity shares have - such as voting rights and the right to receive bonus, dividend etc. To obtain these rights a Call option holder must exercise his contract and take delivery of the underlying equity shares. Long term equity anticipation securities (Leaps) are long-dated put and call options on common stocks or ADRs. Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options. Some of the examples of exotic options are as under: Over-The-Counter options are those dealt directly between counter-parties and are completely flexible and customized. There is some standardization for ease of trading in the busiest markets, but the precise details of each transaction are freely negotiable between buyer and seller. Like stocks, options and futures contracts are also traded on any exchange.
In Bombay Stock Exchange, stocks are traded on BSE On Line Trading (BOLT) system and options and futures are traded on Derivatives Trading and Settlement System (DTSS). The underlying for the index options is the BSE 30 Sensex, which is the benchmark index of Indian Capital markets, comprising 30 scrips. BSE's first index options is based on BSE 30 Sensex. The Sensex options would be European style of options i. e. the options would be exercised only on the day of expiry. Specific Portfolio Analysis of Risk (SPAN) is a worldwide acknowledged risk management system developed by Chicago Mercantile Exchange (CME). It is a portfolio-based margin calculating system adopted by all major Derivatives Exchanges. SPAN identifies overall risk in a complete portfolio of futures and options at the same time recognizing the unique exposures associated with both inter-month and inter-commodity risk relationships. PC-SPAN is an easy to use program for PC's which calculates SPAN margin requirements at the members' end. How PC SPAN works: Each business day the exchange generates risk parameter file (parameters set by the exchange ) which can be down loaded by the member. A portfolio based margining model (SPAN), would be adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on the Derivatives Segment. On Exercise of an Option by an Option Holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm. An investor has to register himself with a broker who is a member of the BSE Derivatives Segment. The exchange is conducting free of cost futures and options awareness programs for member brokers and their clients.
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Futures Day Trading. maximum profits everyday. highly liquid futures contract. • Use of this website andor products & services offered by us indicates your acceptance of our disclaimer. • Disclaimer: Futures, option & stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia. com will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned.
• All names or products mentioned are trademarks or registered trademarks of their respective owners. Chapter 2.02: What are Futures Contracts? In the previous section, we learned about the derivatives market. Now, let’s go a little deeper and understand the futures contracts. What are futures contracts: A futures contract is an agreement between two parties – a buyer and a seller – wherein the former agrees to purchase from the latter, a fixed number of shares or an index at a specific time in the future for a pre-determined price. These details are agreed upon when the transaction takes place. As futures contracts are standardized in terms of expiry dates and contract sizes, they can be freely traded on exchanges. A buyer may not know the identity of the seller and vice versa. Further, every contract is guaranteed and honored by the stock exchange, or more precisely, the clearing house or the clearing corporation of the stock exchange, which is an agency designated to settle trades of investors on the stock exchanges. Futures contracts are available on different kinds of assets – stocks, indices, commodities, currency pairs and so on. Here we will look at the two most common futures contracts – stock futures and index futures. What are stock futures: Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain date.
Once you buy the contract, you are obligated to uphold the terms of the agreement. Here are some more characteristics of futures contracts: LotContract size: In the derivatives market, contracts cannot be traded for a single share. Instead, every stock futures contract consists of a fixed lot of the underlying share. The size of this lot is determined by the exchange on which it is traded on. It differs from stock to stock. For instance, a Reliance Industries Ltd. (RIL) futures contract has a lot of 250 RIL shares, i. e., when you buy one futures contract of RIL, you are actually trading 250 shares of RIL. Similarly, the lot size for Infosys is 125 shares.* Expiry: All three maturities are traded simultaneously on the exchange and expire on the last Thursday of their respective contract months. If the last Thursday of the month is a holiday, they expire on the previous business day. In this system, as near-month contracts expire, the middle-month (2 month) contracts become near-month (1 month) contracts and the far-month (3 month) contracts become middle-month contracts. Duration: Contract is an agreement for a transaction in the future. How far in the future is decided by the contract duration.
Futures contracts are available in durations of 1 month, 2 months and 3 months. These are called near month, middle month and far month, respectively. Once the contracts expire, another contract is introduced for each of the three durations. The month in which it expires is called the contract month. New contracts are issued on the day after expiry. Example: If you want to purchase a single July futures contract of ABC Ltd., you would have to do so at the price at which the July futures contracts are currently available in the derivatives market. Let's say that ABC Ltd July futures are trading at Rs 1,000 per share. This means, you are agreeing to buysell at a fixed price of Rs 1,000 per share on the last Thursday in July. However, it is not necessary that the price of the stock in the cash market on Thursday has to be Rs 1,000. It could be Rs 992 or Rs 1,005 or anything else, depending on the prevailing market conditions.
This difference in prices can be taken advantage of to make profits. What are index futures: A stock index is used to measure changes in the prices of a group stocks over a period of time. It is constructed by selecting stocks of similar companies in terms of an industry or size. Some indices represent a certain segment or the overall market, thus helping track price movements. For instance, the BSE Sensex is comprised of 30 liquid and fundamentally strong companies. Since these stocks are market leaders, any change in the fundamentals of the economy or industries will be reflected in this index through movements in the prices of these stocks on the BSE. Similarly, there are other popular indices like the CNX Nifty 50, S&P 500, etc, which represent price movements on different exchanges or in different segments. Futures contracts are also available on these indices. This helps traders make money on the performance of the index. Here are some features of index futures: Contract size: Just like stock futures, these contracts are also dealt in lots. But how is that possible when the index is simply a non-physical number. No, you do not purchase futures of the stocks belonging to the index. Instead, stock indices points – the value of the index – are converted into rupees. For example, suppose the CNX Nifty value was 6500 points.
The exchange stipulates that each point is equivalent to Rs 1 , then you have to pay 100 times the index value – Rs 6,50,000 i. e. 1x6500x100. This also means each contract has a lot size of 100. Expiry: Since indices are abstract market concepts, the transaction cannot be settled by actually buying or selling the underlying asset. Physical settlement is only possible in case of stock futures. Hence, an open position in index futures can be settled by conducting an opposing transaction on or before the day of expiry. Duration: As in the case of stock futures, index futures too have three contract series open for trading at any point in time – the near-month (1 month), middle-month (2 months) and far-month (3 months) index futures contracts. Illustration of an index futures contract: If the index stands at 3550 points in the cash market today and you decide to purchase one Nifty 50 July future, you would have to purchase it at the price prevailing in the futures market. This price of one July futures contract could be anywhere above, below or at Rs 3.55 lakh (i. e., 3550*100), depending on the prevailing market conditions. Investors and traders try to profit from the opportunity arising from this difference in prices. What are the advantages and risks of futures contracts: The existence and the utility of a futures market benefits a lot of market participants: It allows hedgers to shift risks to speculators. It gives traders an efficient idea of what the futures price of a stock or value of an index is likely to be. Based on the current future price, it helps in determining the future demand and supply of the shares.
Since it is based on margin trading, it allows small speculators to participate and trade in the futures market by paying a small margin instead of the entire value of physical holdings. However, you must be aware of the risks involved too. The main risk stems from the temptation to speculate excessively due to a high leverage factor, which could amplify losses in the same way as it multiplies profits. Further, as derivative products are slightly more complicated than stocks or tracking an index, lack of knowledge among market participants could lead to losses. What are index futures: Now that we have read and understood the basics of futures contracts, let us move on to how they are priced. Click here. Snapshot of profitloss Reflects performance of your portfolio Helps compute taxes. Investment Knowledge Bank. Trading Tools & Research Reports. Account Types & Value Added Services. 1800 209 9191 1800 222 299 1800 209 9292. Alternate Number: 3030 5757.
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