- How to profit from Nifty moves with futures and options
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- DERIVATIVES (FUTURES AND OPTIONS) TRADING
- What is Future and Options in Stock Market? & How to trade in F&O - NTA
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How to profit from Nifty moves with futures and options
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Option Greeks measure the sensitivity of option price to various factors. Option Greeks are very useful for options traders. There are five broad option Greeks to understand. In a nutshell, options can used to trade on price movements, trade on volatility shifts and also to hedge the portfolio by taking positions contrary to your underlying cash market positions.
Options are asymmetric and that makes them more flexible. Tradebulls Securities is one of the leading Indian financial corporations aimed to make trading easier for everyone, even for those who are from a non-trading background. Tradebulls is here for you with its professionally trained team to offer knowledge and guide you through the same. Existing User.
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Preface to forwards and futures Structurally, forwards and futures are largely similar. Futures are an exchange-traded contract Contract specifications Forwards are tailor-made contracts according to the unique needs of participants. Terms of the futures contract are largely standardized Counterparty risk Forwards carry counterparty risk but now there are exchange guarantees on forwards too Clearing corporations of NSE and BSE act as the counterparty Market liquidity Forwards are low on liquidity, unless there is another set of customers with similar profile Since futures are standardized, they are highly liquid Price discovery Not Efficient, as markets are largely informal and there is no central mechanism.
On a daily basis.
Maturity As per the terms of contract. Predetermined date Key shortcomings of forward contracts Having understood the concept of forwards, let us look at some of the limitations of forward contracts and how they are overcome by futures contracts. Forwards can be low on liquidity since it is hard to get secondary market participants for customized contracts. Forwards contracts are not standardized and that makes them less liquid. Since forwards are not listed or traded on exchanges, pricing is quite opaque and also arbitrary at most times. Here the larger participant has an undue advantage compared to the futures contracts which are more democratic.
Forwards are vulnerable to counterparty risk. This risk arises if one of the party defaults.
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The only way out is the legal option, which can be lengthy and cumbersome. Forward contracts are also subject to settlement and clearing complications since these are directly done by the contracting parties and there is no central and objective referee in this case. The centralized trading platform of futures takes care of this. Key characteristics of a futures contract Some of the key attributes of a futures contract can be captured as under: Like in case of forwards, futures are also an agreement to buy or sell an underlying.
For every futures contract, there a buyer and a seller Futures is a contract between two consenting parties through the exchange platform where the exchange acts as the centralized platform The price of the futures is based on transparent price discovery mechanism and like stock prices, these futures prices are also discovered by demand and supply. Futures are leveraged products and hence margins are payable by both the buyer and the seller of the contract. In addition MTM margins are also payable if the price movement is unfavourable. Quality and quantity of the contract are standardized.
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Quantity standardization happens in the form of lot sizes but quality standardization is more relevant to commodity futures since commodities are a lot more heterogeneous Key concepts you need to know about futures contracts Futures contracts are much simpler than options but still there are some unique features to be understood.
Chart source: NSE Futures contracts expire on the last Thursday of every month and at any point of time there are 3 contracts trading viz. Types of margins in futures contracts Since futures are leveraged contracts, the exchange needs to collect margins since the trades are guaranteed by the clearing corporation of the stock exchange.
DERIVATIVES (FUTURES AND OPTIONS) TRADING
Initial Margin When you buy or sell a futures contract on the exchange, the initial margin has to be deposited upfront. Marking to Market MTM Margins This is collected on a daily basis in the futures market, even through the contract may have a maturity of several months. Contract specifications for futures and options The NSE chart below captures the contract specifications for stock futures, index futures, stock options and index options. Chart Source: NSE Contract specifications include the salient features of a derivative contract like contract maturity, contract multiplier also referred to as lot size, contract size, tick size etc.
Index futures and index options are only available on 3 indices Stock futures and stock options are available only on stocks All call options and put options are European in nature Other than Nifty which has long term options, all other contracts only have 3 contracts All contracts expire on the last Thursday of the month, except the weekly options contract which expire every Thursday Strike price intervals for options are determined based on the market price Having understood futures in elaborate detail, let us move on to options and understanding the nuances of options.
What exactly is meant by an Options Contract? Breaking up an Options Contract Why do people buy or sell call and put options. Action Expectation Option Premium Payoff Buy a Call Option Stock will go up Pays the premium to the seller of call Unlimited profit after premium cost is covered and loss is limited to the premium paid Sell a Call Option Stock will not go above a certain price Gets the premium from the buyer of call but has to pay initial margin Profit limited to premium. Unlimited loss if price of the stock goes up Buy Put Option Stock will go down Pays the premium to the seller of put Unlimited profit after premium cost is covered and loss is limited to the premium paid Sell a Put option Stock will not go below a certain price Gets the premium from the buyer of put but has to pay initial margin Profit limited to premium.
Unlimited loss if price goes down The above table captures the payoffs for the key players in any option contract.
What is Future and Options in Stock Market? & How to trade in F&O - NTA
Chart source: NSE In the above option chain analysis, the strike prices of Reliance Options contract are in the centre. Intrinsic Value and Time Value No discussion on options pricing and option valuation is complete without understanding the concepts of intrinsic value and time value. Intrinsic value of an option refers to the amount by which option is in the money i. Remember, the intrinsic value of an option can never be negative. In case of call option, intrinsic value is the excess of spot price S over the strike price X , i. For put options the intrinsic value is X — S Time value is the residual option premium left after intrinsic value is removed.
ITM options will have intrinsic value and time value and when we talk of time decay in options; it is this time value component that actually decays.