How to make money by trading in futures and options

5 stars based on 52 reviews

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 basic background information. The options market makes up for a significant part of the derivative market, particularly in India.

Internationally, the option market has 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 OTC 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 history 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 be 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 futures and options stocks in india 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 futures and options stocks in india 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 answer 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. It turns out that the highway 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 a 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. Here 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 it 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? Futures and options stocks in india, 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 futures and options stocks in india 1lk, he could still buy the land, futures and options stocks in india 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 the 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 futures and options stocks in india 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 futures and options stocks in india this stage. The idea is to understand the bare bone futures and options stocks in india 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. Case 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 core 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 futures and options stocks in india 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 highway project. My first question Karthik is this: The dropdown value on the NSE website does not contain all months expiries — after 18th May futures and options stocks in india have 25th June followed by 24th Sept and then 31st Dec What happened to the other months? For to only Futures and options stocks in india 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.

Etrade options trading requirements for law schools

  • 99 strategy to trading binary options

    Best binary options brokers trading company

  • Binary options trader magazine

    All binary options free demo account no deposit

Binare optionen tages strategie forum

  • Binomo binary options broker customer support

    Top rated online trading companies

  • Sicher binarer handel

    Bind socket error 10013

  • Day option stock trading tips and tricks

    Summary of binary options pro signals service

Binary edge map matlab

11 comments Best tutorial trading iq binary option 2018

Serial and binary search in java recursion

In simple language one future contract is group of stocks one lot which has to be bought with certain expiry period and has to be sold squared off within that expiry period. Suppose if you buy futures of Wipro of one month expiry then you have to sell it within that one month period.

Important - Future contract get expires at every last Thursday of every month. If you buy October month expiry future contract then you have to sell it within last Thursday of October month. Likewise you can buy two months and three months expiry period future contract.

You can buy maximum of three month expiry period. Indices future trading As you can do future trading on stocks likewise you can do trading on different indices like Nifty index, IT index, Auto index, Pharma index etc. Successful trading in futures Future or derivative trading is the process of buying or selling stock future or index future for a certain period of time and squaring off before the expiry date.

Expiry period can be of one month, two month and three month and not more then of three month. Most of the times on 3rd month expiry future you may see very less trading volumes. But on Nifty index contract or on other index contract you may see good trading volumes even on 3rd month expiry future also. You can also buy and sell or sell and buy future contract on the same day of any expiry month. This is called as day trading or intraday in futures.

Selling future contract before buying is called short selling. Short selling is allowed in futures trading. Major Advantages of Futures Trading over Stock Trading 1 Margin is available - In future trading you get margin to buy but can hold only up to maximum of 3 months , while in stock trading you must have that much of amount in your account to buy.

But limitation for this is your expiry period. Means if you bought future of one month expiry then you have to square off within that one month likewise you can buy maximum of three months expiry. This is not possible in stocks. You can short sell futures and can cover off within your expiry period.

For example - If expiry period of your future contract is of 1 month then you have time frame of one month to cover off your order like wise if your future expiry period is of two months then you have time frame of two months and this continues till three months and not more then three months. In short selling of futures also you get margin as you get in buying of futures. Disadvantages of Future Trading over Stock Trading 1 Limitation on holding - If you buy or sell a future contract then you have limitation of time frame to square off your position before expiry date.

For example - If you buy or sell future contract of one month expiry period then you have to square off your position before your expiry date of that month, so in this example you got one month period.

So likewise if you go for two month expiry period then you get 2 months and if you go for three month expiry then you will get 3 month expiry period to square off your position. You can only do on listed stocks on Nifty and Jr. For example - suppose this is month of October then you have to buy till maximum month of December expiry and you have to sell it within last Thursday of December month.

You can sell anytime between these periods. Lot size group of stocks in one future contract varies from future to future contract. For example Reliance Industries future lot size has quantities of shares while a Tata Consultancy service has shares. The margin in other words price of one lot size varies on daily basis based on its stocks closing price.

Future trading can be done on selected stocks listed under Nifty and Jr. Nifty and not on all stocks. The price of future contract is determined by its underlying stock. Trading in Futures Derivatives. Welcome to Investment House Important points to Remember while doing future trading 1 First up all you have to decide whether you want to buy stock derivatives or index derivative.

Once you buy certain expiry period then you have to sell cover off your order before that period. Its no need to wait till the expiry period, you can even square off on the same day if you are getting profit or anytime whenever you feel to book profit, no compulsion to cover off your order on the last day of expiry.

Method of Short Selling Short selling selling before buying in future trading In future trading you can do short selling and buy cover later when price comes down from your selling price you can short sell stock future as well as index future. But again same restriction will apply and that is of expiry period.

If you need any clarification on futures trading please Contact us. Information presented on this site is a guide only. It may not necessarily be correct and is not intended to be taken as financial advice nor has it been prepared with regard to the individual investment needs and objectives or financial situation of any particular person. Stock quotes are believed to be accurate and correctly dated, but www. Financial contents like Technical charts, historical charts and quotes are taken from NSE and Yahoo sites.

Note - All quotes are delayed by 15 minutes and unless specified. Google Adsense Ads are posted on every page of the website so visitors clicking on Ads and going to those links and carrying any financial deal is not at all related to www. Please read at www. Following are terms to search more information.