Futures OR Options

Futures:
ReCap from previous posts.
In the First Episode :
A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.
The primary Difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.
Underlying: A stock (Say RPL) or Index (Say Nifty)
Certain Date: Settlement Date of the Month for which Position is taken. Generally we trade in Current Month and Settlement Date is last Thursday of the Month.
Interpretation ...
Say Today I buy RPL future For Rs 230 when current market Price for RPL in cash market is 225.
This means on Settlement date:(31 jan for this month) if RPL is @ Rs 230(future price) its no Profit no Loss for me, and if its 250(settlement price) I gain Rs 20 but I loose Rs 20 if its 210.

So same way, seller of the future contract gains the amount I loose or looses the Amount I gain.

Benefit: Unlimited Profits Posssible, Leverage I get....
Drawback: Unlimted Loss Possible

Now Lets Talk about Options:
An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.

Options can be call option or put option where you get the right to buy or sell specified quantity of the underlying security.

Buyer has to pay a premium to get the rights to buy or sell. Seller of options is also called writer who is obliged to perform according to option terms.

There are many factors which affects the price of an option.
1. Underlying value of the security.
2. Time remaining till the expiry. Options generally decay near the expiry because price of the underlying becomes more predictable and less probabilistic and volatile.
3. All the other information which affects the underlying security like interest rates, divident payouts, liquidity, historical prices, support zones etc.

Underlying : Lets say Nifty Index
You bought a Nifty call option for the strike price of 2800. On expiration the Nifty is at 2850. You will recieve 50*50 which is the lot size for Nifty = Rs 2500. If you have already paid a premium of Rs 20 then you profit remains 30*50 which is Rs 1500. Also you have to factor in the brokerage both for buy and sell. There is mini nifty available with lot size of 20. If the Nifty at expiry is below 2800 you dont get any thing and you loose premium + brokerage.

Other articles on derivatives.
Derivatives Basics

Y Derivatives?

Stock Option Trading Myths Debunked

I have explained what are derivatives (futures and options) in my previous posts.

My previous posts on derivatives :-

Futures or Options

Derivatives Basics

Y Derivatives?

I was going to start writing an article discussing various option strategies soon.I found this cool video which clears all the myths around option trading.
It would be good to watch and understand before going deep into various strategies like straddle, collar, cover put, married put etc.

Various myths covered are Complexities around optioms, assumption that it is hard to learn and master, it is time consuming, losses are huge , its high risk and investor always loses money and so on and on ...

Before you take a dive into options have a look at this video.

Futures or Options

Futures:
ReCap from previous posts.
In the First Episode :
A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.
An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.
The primary Difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.

Underlying: A stock (Say RPL) or Index (Say Nifty)
Certain Date: Settlement Date of the Month for which Position is taken. Generally we trade in Current Month and Settlement Date is last Thursday of the Month.
Interpretation ...
Say Today I buy RPL future For Rs 230 when current market Price for RPL in cash market is 225.
This means on Settlement date:(31 jan for this month) if RPL is @ Rs 230(future price) its no Profit no Loss for me, and if its 250(settlement price) I gain Rs 20 but I loose Rs 20 if its 210.

So same way, seller of the future contract gains the amount I loose or looses the Amount I gain.

Benefit: Unlimited Profits Posssible, Leverage I get....
Drawback: Unlimted Loss Possible

Now Lets Talk about Options:
An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.

Options can be call option or put option where you get the right to buy or sell specified quantity of the underlying security.

Buyer has to pay a premium to get the rights to buy or sell. Seller of options is also called writer who is obliged to perform according to option terms.

There are many factors which affects the price of an option.
1. Underlying value of the security.
2. Time remaining till the expiry. Options generally decay near the expiry because price of the underlying becomes more predictable and less probabilistic and volatile.
3. All the other information which affects the underlying security like interest rates, divident payouts, liquidity, historical prices, support zones etc.

Underlying : Lets say Nifty Index
You bought a Nifty call option for the strike price of 2800. On expiration the Nifty is at 2850. You will recieve 50*50 which is the lot size for Nifty = Rs 2500. If you have already paid a premium of Rs 20 then you profit remains 30*50 which is Rs 1500. Also you have to factor in the brokerage both for buy and sell. There is mini nifty available with lot size of 20. If the Nifty at expiry is below 2800 you dont get any thing and you loose premium + brokerage.

Other articles on derivatives.
Derivatives Basics

Y Derivatives?

Y Derivatives??

Previous article : Derivative basics

Derivative products initially emerged as hedging devices against fluctuations in commodity prices.

But we will talk about use of Derivatives in Equity Market….

Use of Derivatives

Hedging
Making an investment to reduce the risk of adverse price movements on your Portfolio.
A perfect hedge reduces your risk to nothing.
--Is done by the People who are not confident enough on the choice of there investment.

Speculation
The process of selecting investments with higher risk in order to profit from an anticipated price movement.
They call it a form of Gambling.
--The way for making or losing a lot of money

Arbitrage
The simultaneous purchase and sale of a Stock/Security/Contract in order to profit from a difference in the price. This usually takes place on different exchanges or marketplaces.
--I am still not able to find a real time direction to profit from this.

Out of the Above three I mostly indulge in Speculative trading and very rarely in Hedging.
And Speculation to me is Intuition, News, Market whispers and Mahitosh's Tips :D

Previous article : Derivative basics

Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.
--Warren Buffet

Beyond Equity Trading -- Derivative Basics

Before you decide not to invest in Derivatives, you should understand them

From today I would like to share my experiences with derivatives and in the same time explain few basic principles. This tutorial will be in phases n I will go slowly and post small articles so that everyone can digest it.

What is a Derivative ?????
Investopedia Definition:
A derivative security can be defined as a security whose value depends on the values of other underlying variables.

Futures & Options are the most common types of derivatives.

A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.

An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.

The primary Difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.

Just try to look at the picture and get the basic understanding. Details will be available in future posts.

Click on the image to see larger picture.

Disclaimer:
Derivatives involve risks and are not suitable for everyone. Derivatives trading can be speculative in nature and carry substantial risk of loss. Only invest with risk capital.

Follow up article to Y Derivatives?