Futures Trading

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As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options and therefore know nothing about options. For this reason we will start from scratch and slowly ramp up as we proceed.

Let us start with running through some future and options trading zerodha background information. The options market makes up for a significant part of the derivative market, particularly future and options trading zerodha India. Internationally, the option market future and options trading zerodha been around for a while now, here is a quick background on the same —.

Clearly the international markets have evolved a great deal since the Future and options trading zerodha days. However in India from the time of inception, the options market was facilitated by the exchanges. The badla system no longer exists, it has become obsolete.

Here is a quick recap of the future and options trading zerodha of the Indian derivative markets —. Though the options market has been around sincethe real liquidity in the Indian index options was seen only in ! I remember trading options around that time, the spreads were high and getting fills was a big deal.

However inthe Ambani brothers formally split up and their respective companies were listed as separate entities, thereby unlocking the value to the shareholders. In my opinion this particular corporate event triggered vibrancy in the Indian markets, creating some serious liquidity. However if you were to compare the liquidity in Indian stock options with the international markets, we still have a long way to catch up.

There are two types of options — The Call option and the Put option. You can future and options trading zerodha a buyer or seller of these options. In fact the best way to understand the call option is to first deal with a tangible real world example, once we understand this example we will extrapolate the same to stock markets.

Consider this situation; there are two good friends, Ajay and Venu. Ajay is actively evaluating an opportunity to buy 1 acre of land that Venu owns. The land is valued at Rs. Ajay has been informed that in the next 6 months, a new highway project is likely to be sanctioned near the land that Venu owns.

If the highway indeed comes up, the valuation of the land is bound to increase and therefore Ajay would benefit from the investment he would make today. So what should Ajay do? Clearly this situation has put Ajay in a dilemma as he is uncertain whether to buy the land from Venu or not. While Ajay is muddled in this thought, Venu is quite clear about selling the land if Ajay is willing to buy.

Ajay wants to play it safe, he thinks through the whole situation and finally proposes a special structured arrangement to Venu, which Ajay believes is a win-win for both of them, the details of the arrangement is as follows —. So what do you think about this special agreement? Who do you think is smarter here — Is it Ajay for proposing such a tricky agreement or Venu for accepting such an agreement? Well, the future and options trading zerodha to these questions is not easy to answer, unless you analyze the details of the agreement thoroughly.

I would suggest you read through the example carefully it also forms the basis to understand options — Ajay has plotted an extremely clever deal here! In fact this deal has many faces to it. Now, after initiating this agreement both Ajay and Venu have to wait for the next 6 months to figure out what would actually happen. However irrespective of what happens to the highway, there are only three possible outcomes —.

Remember as per the agreement, Ajay has the right to call off the deal at the end of 6 months. Now, with the increase in the land price, do you think Ajay will call off the deal? This means Ajay now enjoys the right to buy a piece of land at Rs.

Clearly Ajay is making a steal deal here. Venu is obligated to sell him the land at a lesser value, simply because he had accepted Rs. Another way to look at this is — For an initial cash commitment of Rs. Venu even though very clearly knows that the value of the land is much higher in the open market, is forced to sell it at a much lower price to Ajay. The profit that Ajay makes Rs. Future and options trading zerodha turns out that the future and options trading zerodha project was just a rumor, and nothing really is expected to come out of the whole thing.

People are disappointed and hence there is a sudden rush to sell out the land. As future and options trading zerodha result, the price of the land goes down to Rs. So what do you think Ajay will do now? Clearly it does not make sense to buy the land, hence he would walk away from the deal.

Future and options trading zerodha is the math that explains why it does not make sense to buy the land —. Remember the sale price is fixed at Rs. Hence if Ajay has to buy the land he has to shell out Rs. Which means he is in effect paying Rs. Clearly this would not make sense to Ajay, since he has the right to call of the deal, he would simply walk away from future and options trading zerodha and would not buy the land.

However do note, as per the agreement Ajay has to let go of Rs. For whatever reasons after 6 months the price stays at Rs. What do you think Ajay will do? Well, he will obviously walk away from the deal and would not buy the land. Why you may ask, well here is the math —. Clearly it does not make sense to buy a piece of land at Rs. Do note, since Ajay has already committed 1lk, he could still buy the land, but ends up paying Rs 1lk extra in this process.

For this reason Ajay will call off the deal and in the process let go of the agreement fee of Rs. I hope you have understood this transaction clearly, and if you have then it is good news as through future and options trading zerodha example you already know how the call options work! But let us not hurry to extrapolate this to the stock markets; we will spend some more time with the Ajay-Venu transaction. I would suggest you be absolutely thorough with this example. If not, please go through it again to understand the dynamics involved.

Also, please remember this example, as we will revisit the same on a few occasions in the subsequent chapters. Do note, I will deliberately skip the nitty-gritty of an option trade at this stage. The idea is to understand the bare bone structure of the call option contract. Assume a stock is trading at Rs. You are given a right today to buy the same one month later, at say Rs. Obviously you would, as this means to say that after 1 month even if the share is trading at 85, you can still get to buy it at Rs.

In order to get this right you are required to pay a small amount today, say Rs. If the share price moves above Rs. If the share price stays at or below Rs. All you lose is Rs. After you get into this agreement, there are only three possibilities that can occur. Case 1 — If the stock price goes up, then it would make sense in exercising your right and buy the stock at Rs. Future and options trading zerodha 2 — If the stock price goes down to say Rs.

Case 3 — Likewise if the stock stays flat at Rs. This is simple right? If you have understood this, you have essentially understood the future and options trading zerodha logic of a call option. What remains unexplained is the finer points, all of which we will learn soon. At this stage what you really need to understand is this — For reasons we have discussed so far whenever you expect the price of a stock or any asset for that matter to increase, it always makes sense to buy a call option!

Now that we are through with the various concepts, let us understand options and their associated terms. Hi Sir, Options is like greek and latin to me.

Thanks for the analogies. No, all derivative contracts are routed via the exchanges. You cannot enter into an OTC arrangement, even if you do, it would not be regulated hence quite dangerous. What benefit would Ajay get by calling off the deal before the expiry of 6 months?

He will instead wait for the whole 6 months for any chance of the future and options trading zerodha project.

My first question Karthik is this: The dropdown value on the NSE website does not contain all months expiries — after 18th May we have 25th June followed by 24th Sept and then 31st Dec What happened to the other months? For to only June and Dec contracts are available.

What happened to the remaining? Saurabh, glad you noticed it! For all stocks options the expiry is very similar to futures. Hence we have current month, mid month, and far month contracts. However for Nifty there are several different expiry options. Leaps are good if you have a super long term view on markets. However the problem with leaps in India is that they are not liquid, there are hardly any trading activity here.

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When you take a trade in equity and square the position off before the end of day, it is called as intraday equity trading. You can trade intraday at Zerodha with leverage by using these 2 product types while taking a trade. When you use this product type, you commit on keeping the trade intraday and hence we give you a leverage between 3 to 10 times based on the risk and volatility of the stock. Our margin calculator tool has a list of all stocks and the MIS leverage you get.

In case of such a situation arising, the onus of squaring off the position will be on the Client. Cover orders is a unique feature at Zerodha where you can trade intraday using market orders but with a definite and compulsory stop loss.

Since the risk with such a position is low, the margin required is less and hence the leverage higher. When you trade intraday using cover orders, the leverage you get vary from 6 to 20 times twice as much as MIS. But again all open positions get squared off around 3. Read this to know more on cover orders. When you buy stock and hold it overnight, it is called a delivery trade. At Zerodha, you need to use product type as CNC while placing a trade to take delivery of equity stock. The product type CNC will show up on your order window only if you have a demat account mapped to your trading account since you would require a demat to take delivery of the equity that you purchase.

At Zerodha we provide no leverage when you are executing delivery trades which mean that you if you want to buy Rs 1lk of stock as CNC, you will need this Rs 1lk in your trading account and similarly if you want to sell Rs 1lk of shares with product type as CNC, you will need these shares in your demat account mapped to your trading account.

Futures as such are inherently leveraged which means that to buy X amount of futures you need only a small portion of it called as margin in your account. This margin to buy futures is stipulated by the various exchanges. MIS is used by intraday traders as all open positions get squared off before the end of day. But since no position is carried forward overnight the margin required is also lesser than the exchange stipulated margins.

Presently Cover order facility is available for equity, commodity and currency futures. When you buy options, either equity or currency there is no additional leverage we provide except in case of market orders where orders may get traded in value excess of funds available in the account.

So if you are buying calls or puts of any contract, the premium required to buy them has to be present in your trading account. When you short an option, the margin required depends on various aspects like underlying, expiry, volatility and more. We are the first brokers in India to have an online SPAN calculator tool which lets you calculate the margin requirement for shorting an option by mocking the position in the tool.

Love playing poker, basketball, and guitar. Suppose your are holding rs 2 lakh worth stocks in ur demat account and have 1 lakh cash, wat wud be the initial margin for intraday trading in Nse Futures or options? Pledge as in you have to transfer the stocks to any other demat account or will the stocks stay in your demat as the margin is only for intraday?

Can I use this margin for intraday equity trading too? Also are there any charges for pledging the stocks? And is it really necessary to send an email for the same? One round trip of pledge and unpledge costs around Rs 55 per scrip irrespective of the quantity. On Q, we are giving an option to place a pledge request. It will still take around 24 hours to get the benefit. Thanks for such a prompt reply. Initially I was amazed when I saw 0. Prateek, we charge 0.

But yes the pledging bit is something that will be simplified in the next few months. Can you tell me why you are giving margin for future and option only, not for intraday equity scripts.

We give for intraday equity scrips as well, check this: Can you please confirm — 1 Does Zerodha charge interest on the margin provided against shares pledged?

I want to create a pledge and keep writing covered calls for a considerable duration. If yes, how much? So, I believe some cash component will be required so as to avoid small transactions for any shortfall in margin. I am asking from Zerodha margin policy point of view and not risk-cover point of view. I hope it does. If one underlying falls in value reducing over all margin without increasing risk level will there be an auto square off? The other underlying may be up and that call might be showing a loss.

Do I have any control on which position gets squared off? IMO, nothing needs to be squared off since there is no margin risk on any position. If not, is there any way I can mark some position as a covered call position and pledge equivalent number of shares? Currently we are not, very soon we will as we intend to provide margins without even pledging stocks lying in demat.

How much is still not decided. But for now, there is no charge. It will be charged based on how much margin used. Yes, you are the owner of the stock, you will get benefit of all corporate action. No, it is all treated as call option writing. No margin benefit you get because you are writing calls on the same stock.

You will not have control on what gets squared off first. So it is best to have some additional cash for all MTM losses. Sir, Would it be Pledge or Pool transfer.? A follow up question on this one: Also, if this is possible, can such an order be a Limit order or will it only be a market order?

Allow me to ask with a hypothetical example:. Vikesh, it will be a pledge. If you want to sell, you will have to first unpledge and only then sell. I have stock in south indian bank at ambalalshares and pledged them with axis bank and created a overdraft account for the stock, can i do this also in zerodha.

Hope you will provide the option to the customer of — either 1 Pay Interest on margin and let the shares in demat or 2 Pay pledge-release fees and no interest on margin the present system. What is the right way of doing this? PD, This process of manually having to pledge is something we will be stopping soon. Will keep you posted on what route we take. Dear sir, I am a new trader in zerodha. Can you please tell me what is the exact square off time for intraday trade i.

In your site time has mentioned as 3: And for 5 mints i had lost Rs. Dear sir, there is only 3 times trading limit for intraday.

Compare to others too less. It is upto 20 times based on the stock. I have entered in 4 fno stock futures position yeterday, while entering i have sufficient funds, later today wen i checked my acc is short of 18k funds, may be due to MTM.. My question is today will get chance to exit and get some funds or is there anything like u will squareoff to provide for the margin.

Varun, if you have any urgent query call our support numbers. If the margin in your account drops below the minimum SPAN margin, it gets squared off usually between 3.

Until you receive credit, you cannot withdraw this fund. As such, you see this as a margin until then. Read more about the settlement process here: If you could arrange the leverage for equity delivery trades for a week like 5 to 10 times would be helpful. The investor can expect bull trend and helps nations to uptrend attracting the investors. Margin policy coming soon for delivery reading…I heard this from last 7 months but when you started?

Is investment value as per current value March month will added in my demat account or i should take some other step for return back my investment. If a stock is delisted for regulatory reasons then there is no way for you to sell unless the issue is resolved. However, if a company goes for a voluntary delisting then there will be a window wherein you can tender your shares at a price specified by the company.

How much is upto you. You can check out margin required to trade different commodities here: I never spoke to any person in zerodha office. I dont know how to make call with the number given in the website. I want to trade in commodities and currencies.

I cannot buy huge quantities in index option and stock option. Only a few quantities are accepted. You should check out the Kite user manual , Zo.

Is trading on margin allowed in this case on Zerodha or I can buy only my account balance without leverage. In case of delivery, leverage option is not there on Zerodha.