Future and options tutorials (speculation vs hedging derivative market),

Future & options definition

Derivativing value from underlying asset.

(Underlying asset = stock price).

If stock price grows derivative also go based on speculation

speculation vs hedging

speculating: expecting growth or down.

Hedging: reducing risk of loss.

Future: speculation:

with 20% margin for period (1-3 months). If one 1 month your derivative price increases based on stock price. So you get profit. Otherwise loss (you have to pay remaining loss broker).

Ex: A stock price ₹100(group of stock price =1 lot)

(You bought 100 stocks or lot).

with 2000 instead of 10000(that 2000 also from broker margin based on your stock holdings).

within a contract (1month or 2 months or 3 months).

If price grows 1stock 100 to 110, then your total holdings value 10k+1k (you got 1k profit just spending zero money. But have bare the risk.

Option: hedging

limiting the loss,

Ex: buying worth 15k of share each 400₹ share. With 10 each total spending (1500*10= 15k).

If the loss occurs you more than limit:

Ex ₹400-300 total loss = (100*15k=150k).

But you only loose 15k, if you get profit above 410, then it will be unlimited.

Futures vs options

Future: risk of unlimited loss

Charges for futures: buy & sell (up front margin & mark to market margins)

Options: only the premium margins

Call vs put in derivatives

Call=buy order.

Put= sell order

The traders who wins &other lose based on their speculations, the broker gets commission &govt also gets tax.

What is derivative market?

Where this future & options are traded called as derivative market. a stock exchange/ stock market.

financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives.

You wanna know about commodities.

Forward contract vs future contract

forward contract: just an future agreement with buyer &seller.

Risk of, default, liquidity, no regulatory, rigidity risk.

Future contract: same as above but on a exchange, tradable, regulator as sebi, standard size lot, structured as compared to forward contract.

Future contract types & expiry

Near contact (current month)

next contact(next month)

Far contact(next 2nd month)

Expiry date if future contract: last Thursday day of every month.

Lot size(group shares)

In future & options (FNO) contract has to be standard.

Lot is a group of share.

If lot size =100 (then 100 shares of a company stock)

Example TCS contact:

TCS share price 2000

Lot size decides by stock price

250

So total future contract value= shares*share price

250*2000=500000(5 lakhs)

if you want to buy in cash/NSE you have to pay 5 lakhs.

Contract value: lot size *price for share.

FNO margin & leveraging

in the above instead of buying at whole you pay margin amount.

It’s calculated automatically while buying contact.

Ex: for 5 lakhs you have pay only 1 lakh.

4 lakhs as leveraging.

Margin money by your stock broker:

in cash market/equity: margin amount lend by your stock broker is 50% of your current stock holdings.

In futures market maybe 6x times than your current holdings/assets.

Leveraging:

Standard contact value most of the companies at 6 lakhs.

Decides by exchange and sebi.

6lakhs/1lakhs=6 x

After selling future contract you may get profit or loss by leveraging (1+5 lakhs). you spent 1lakh for 6lakhs property &sold at 6.5 as a profit without spending 5lakhs that’s called leveraging.

Future contract: Settlement

If loss you have to pay loss only to broker.(

Ex: 1 lakh margin 6lakhs contract

60000(share price if 100* 6000share price each)

If share. Price down at 5500 within contact period (1/2/3) months.

500*100=50,000 you have to pay to your broker, otherwise he sells your stocks and settles his fees& commission.

Tax:

STCG: selling contact within maturity

LTCG: selling after maturity period

know more here

capital gain tax