Derivative (Future_Option)
The four major types of derivative contracts are options, forwards, futures, and swaps. But future & options are mostly used by investors and traders, so let’s understand future and option trading.
Future and option are two derivative instruments where the traders buy or sell an underlying asset at a pre-determined price. The trader makes a profit if the price rises. In case, he has a buy position and if he has a sell position, a fall in price is beneficial for him.
What is Future trading?
Futures are a type of derivative contract agreement to buy or sell a specific Stock, Index, commodity asset, or security at a set future date for a set price. Futures contracts, or simply "futures," are traded on futures exchanges like the NSE, BSE, and MCX and require a trading account that’s approved to trade futures.
A futures contract involves both a buyer and a seller, similar to an options contract. Unlike options, which can become worthless at expiration, when a futures contract expires, the buyer is obligated to buy and receive the underlying asset, and the seller of the futures contract is obligated to provide and deliver the underlying asset.
In a directional market, we can buy future contracts for better profit or we can short sell in an Index or particular stock or Commodity market without any holding. Futures generally have two uses in investing: hedging (risk management) and speculation. Suppose, you have bought any stock for good profit but suddenly fell due to news like Adani Hindenburg news, in this case, you can short sell in the Adani stock futures contract as a hedging tool.
Benefits of Future Trading:-
Individual investors and traders most commonly use futures as a way to speculate on the future price movement of the underlying asset. They seek to profit by expressing their opinion about where the market may be headed for a certain commodity, index, or financial product. Some investors also use futures as a hedge, typically to help offset future market moves in a particular commodity that might otherwise impact their portfolio or business.
Of course, stocks or ETFs can similarly be used to speculate on or hedge against future market moves. They all have their risks you need to be aware of, but there are some distinct benefits the futures market can offer that the equities market does not.
1. Leverage
Establishing an equity position in a margin account requires you to pay 20-50% or more of its full value. With futures, the required initial margin amount is typically set between 20-50% of the underlying contract value. That leverage gives you the potential to generate larger returns relative to the amount of money invested, but it also puts you at risk of losing more than your original investment. Future contracts already leverage the product, margin amount is variable as per Stock and index lot size or price.
NIFTY FUTURE LOT SIZE 50 and Margin required 1L to 1.15L
BANKNIFTY FUTURE LOT SIZE 15 and Margin required 90K to 95K
FINNIFTY FUTURE LOT SIZE 50 and Margin required 1.5L to 1.10L
2. Short Selling
With futures, the margin requirement is the same for long and short positions, enabling a bearish stance or position reversal without additional margin requirements. Suppose, you have bought any stock for good profit but suddenly fell due to news like Adani Hindenburg news, in this case, you can short sell in the Adani stock futures contract as a hedging tool. If we don’t have any stock in delivery in this case also you can short selling, if are getting an opportunity to good profit.
You have to know about contract expiry & lot size
EXPIRY DAY
In our Indian market, 3 contract expiry at a time suppose the current month is January 2023
1st Expiry will be the last Thursday of January 2023
2nd Expiry will be the last Thursday of February 2023
3rd Expiry will be the last Thursday of March 2023
After the expiry of March contract, a new expiry contract will start in April 2023.
Suppose, there is a holiday on Thursday, then Wednesday will be the expiry day.
Lot size
To trade in calls and puts we cannot buy two or five quantities, we always have to buy in a lot size, in which there are different quantities within the lot size.
Lot size may be changed as per Stock and index price & price movements
An example is given below for your reference
NIFTY FUTURE LOT SIZE 50
BANKNIFTY FUTURE LOT SIZE 15
FINNIFTY FUTURE LOT SIZE 50
MIDNIFTY FUTURE LOT SIZE 75
SENSEX FUTURE LOT SIZE 10
FOR STOCK ALSO DIFFERENT LOT SIZE