Options and futures trading tutorial
As with any of the previous modules in Varsity, we will again make the same old assumption that you are new to options options and futures trading tutorial 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 options and futures trading tutorial 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 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 options and futures trading tutorial 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 options and futures trading tutorial.
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? Options and futures trading tutorial, 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 options and futures trading tutorial 1lk, he could still buy the land, options and futures trading tutorial 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 options and futures trading tutorial this to the stock markets; we will spend some more time with the Ajay-Venu transaction.
I would suggest you options and futures trading tutorial absolutely thorough with this example. If not, please go through it again to understand options and futures trading tutorial 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 options and futures trading tutorial 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. Case 2 — If the stock price goes down to say Rs.
Case 3 — Likewise options and futures trading tutorial the stock stays flat at Rs. This is simple right? If options and futures trading tutorial 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 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 highway 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 options and futures trading tutorial 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 options and futures trading tutorial problem with leaps in India is that they are not liquid, there are hardly any trading activity here.
An introductory article on Futures. Describes what a forward contract means along with a practical illustration of the concept. The article discusses the procedure for settling the forward contract.
The article starts by discussing the drawbacks of Forwards contracts and progress to discuss how a futures contract overcomes these drawbacks. Examples are quoted to make the concept clear. The article explains how a trader can employ futures contract to financially profit from his directional view on a stock or an index. Practical examples are used to illustrate how the trade would evol.
This chapter discusses leverage, the central theme of futures trading in detail. The contract between futures options and futures trading tutorial spot market is discussed. The chapter also touches upon leverage calculation.
This chapter gives you all the necessary information that you need to know before placing your first futures options and futures trading tutorial. The chapter also throws light into why brokers and exchanges charge margins. This chapter gives you an overview of how to use a margin calculator. In addition the chapter also touches upon spread trading such as calendar spreads. The chapter explains options and futures trading tutorial that you need about shorting, be it futures options and futures trading tutorial stocks with practical real life examples.
Emphasis is options and futures trading tutorial made on things you need to take care of when you short stocks or futu. This chapter is a primer on trading Nifty Futures. All that you need to know about Nifty futures is discussed in this chapter including the impact cost, liquidity, and benefits of trading Nifty future.
This chapter is a primer on how future contracts are priced with respect to the spot prices. The chapter also discusses the concept of premium, discount, and the convergence of futures and spot price. This chapter gives a step by step instruction on how to hedge a portfolio of stocks with the help of a futures instrument. The chapter also has a detailed description on beta and method to calculate t.
This chapter explores in details the concept of open interest and its relevance to futures trading. The chapter also includes a guide on how to interpret the change in open interest with respect to ch.
Background — Forwards Market An introductory article on Futures. Introduction to Stock Markets 14 chapters 2. Technical Analysis 20 chapters 3. Fundamental Analysis 16 chapters 4. Futures Trading 12 chapters 5. Options Theory for Professional Trading 23 chapters 6. Option Strategies 13 chapters 7.
Markets and Taxation 7 chapters 8. Trading Systems 10 chapters.
Because not only you will have the 50 of chances (Like when you toss a coin), but you will always know since the beginning how much you could earn and how much you could lose. Its quite different from trading with Stocks or trading with currency pairs in the Forex market: even before investing the money, you will know your potential profits and potential losses.
Your profits will entirely depend on the variation of the prices of the selected Asset. With the Binary Options you will know the Payout (A.
The profits, the return on the investment done): that is a percentage on the investment made on a Binary Option.