Derivatives do away with the need to invest a large amount of capital upfront and allowing you to benefit from market movements. This gives you greater liquidity than most other assets. They are an excellent avenue to help you leverage on anticipated market movements and an effective tool to hedge your risks, speculate and earn returns in a relatively shorter duration. You can trade in:- 

 

Futures - contracts or an agreement between two parties to either buy or sell a fixed quantity of assets at a particular time in the future for a fixed price .

 

Options-An option is a contract, which gives the buyer the right to buy or sell shares at a specific price, on or before a specific date. For this, the buyer has to pay to the seller some money, which is called premium. There is no obligation on the buyer to complete the transaction if the price is not favorable to him.To take the buy/sell position on index/stock options, you have to place certain % of order value as margin. With options trading, you can leverage on your trading limit by taking buy/sell positions much more than what you could have taken in cash segment.

The Buyer of a Call Option has the Right but not the Obligation to Purchase the Underlying Asset at the specified strike price by paying a premium whereas the Seller of the Call has the obligation of selling the Underlying Asset at the specified Strike price.

The Buyer of a Put Option has the Right but not the Obligation to Sell the Underlying Asset at the specified strike price by paying a premium whereas the Seller of the Put has the obligation of Buying the Underlying Asset at the specified Strike price.
By paying lesser amount of premium, you can create positions under OPTIONS and take advantage of more trading opportunities.

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Key Benefits:

• Leverage-Enables you to get higher trading exposure with a low margin amount

• Hedging-Allows you to safeguard yourself against potential losses, by hedging your positions. As a part of this, you buy in the cash segment and agree to sell in the derivatives market or vice versa.

• Risk Flexibility-Allows you to choose between conservative or high risk strategies based on the expected rise and fall of stock prices

• Higher Probability of Returns-Possibility to garner returns irrespective of market moving up, down or sideways

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Future Price= Spot Price+Cost of Finance-Dividends.

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While dealing in F&O we should keep in mind the following terms

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1) Lot size

2) Open Intersets (OI)

3)Margin

4) MTM

5) premium

6) Discount

7) Long Build up

8) short Build up

9) Call

10)Put

11) option buyer

12)option seller

13) settlement price.

14) Stock Future and Options

15) Index Future and option

Understanding these concepts with example

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What are futures?

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Futures are contracts made between two parties wherein they agree to buy or sell a particular asset at a fixed price at a particular time in the future. This helps in reducing the risk and losses involved. Let’s say you are a soybean farmer, there is good rainfall and hence the supply of soybean is high and so the prices come down. You will be at loss as a farmer. Think of the soybean buyer now. Due to unexpected drought, the price of soybean goes up. So as a buyer, he has to shell out more and hence he faces loss. To avoid these losses, it is essential to enter into futures contract. This will protect you irrespective of the market fluctuations. For example, the price of soybean hits Rs. 350 after 3 months, but if you have already made a futures contract at Rs. 400, you will gain a profit of Rs. 50 even though the market price is Rs. 350. By this way, you can predict the future demand, price and also reduce the losses. You can actually trade using lesser margins in case of futures contract

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What are options?

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Option contract gives buyer the right, but he is under no obligation to buy or sell the asset. Whereas the seller of the options contract is under obligation to buy or sell the asset based on the option contract buyer’s decision. For example, you have a bike and purchased insurance for the bike at Rs. 10000. If your bike is damaged, you will get your insurance claim as per the agreement. But if no such damage happens, the premium you paid becomes the income for the insurance company. In case of option buyer, the return potential is unlimited whereas risk or loss is limited to premium only. In case of option seller, return is limited to the premium whereas the risk involved is unlimited. There are 2 types of options namely call option and put option

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1. Call option

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In this case, the owner has the right but has no obligation to buy the asset. For example, you made a call option contract with say Kumar for buying TCS share at Rs. 500. The price of TCS in the market is Rs. 600. So you will definitely prefer to buy share from Kumar at Rs. 500 rather than paying Rs. 100 more. Your profit is Rs. 100 in this case. If the price of the share is Rs.400 in the market, you would prefer to buy it from the market rather than buying it from Kumar. So what profit does Kumar get here? When you enter into a contract, you are required to pay a premium. So even if you don’t buy the shares from Kumar, he is benefitted due to

the premium you have paid earlier.

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2. Put option:

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Put option buyer has the right to sell but has no obligation to sell the contract and put option seller has the obligation to buy. In this case too, the buyer of the contract pays premium. Profit is unlimited in case of contract buyer whereas it is limited in case of contract seller

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What are stock futures:

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In case of stock futures, the underlying asset is an individual stock. Market lot, tick size, expiry date, price quote and other standard specifications are mentioned in these contracts. Futures price is based on the sum of spot price and cost of carry. 

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What are index futures:

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These are based on an underlying index. This is a very important tool with which you can hedge your risk. It gives an opportunity to buy shares indirectly by buying the index. Start trading in futures as it offers tremendous potential to make profits.

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