e-Book: 50 Futures and Options Trading Strategies.
In an attempt to create awareness about the futures & options market, moneycontrol has come up with an e-Book on various strategies that can be used in the derivatives market.
In an attempt to create awareness about the futures & options market, moneycontrol has come up with an e-Book on various strategies that can be used in the derivatives market.
Download the pdf from the attachment.
Disclaimer: The strategies mentioned in this e-book are only for learning purpose and cannot be construed as recommendations. Please consult your broker/financial adviser before executing a trade.
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FAQs: Futures and Options trading in India.
WITH the exit of badla from the coming month, the stockmarket will see the introduction of options and futures in a big way. For investors who have difficulty in understanding the terminologies associated with options and futures as well as its modes of working, here's some lucid explanation.
An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy or sell specified quantity of the underlying assets, at a specific (strike) price on or before a specified time (expiration date).
Underlying - The specific security / asset on which an options contract is based.
When the holder of an option exercises his right to buy/ sell, a randomly selected option seller is assigned the obligation to honor the underlying contract, and this process is termed as Assignment.
An American style option is the one which can be exercised by the buyer on or before the expiration date, i. e. anytime between the day of purchase of the option and the day of its expiry.
A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date.
A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before a expiry date.
A call option position that is covered by an opposite position in the underlying instrument (for example shares, commodities etc), is called a covered call.
The intrinsic value of an option is defined as the amount by which an option is in-the-money, or the immediate exercise value of the option when the underlying position is marked-to-market.
Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. An option loses its time value as its expiration date nears. At expiration an option is worth only its intrinsic value. Time value cannot be negative.
There are two types of factors that affect the value of the option premium:
The theoretical option pricing models are used by option traders for calculating the fair value of an option on the basis of the earlier mentioned influencing factors.
Options Premium is not fixed by the Exchange. The fair value/ theoretical price of an option can be known with the help of pricing models and then depending on market conditions the price is determined by competitive bids and offers in the trading environment.
The price of an Option depends on certain factors like price and volatility of the underlying, time to expiry etc. The option Greeks are the tools that measure the sensitivity of the option price to the above mentioned factors.
An option calculator is a tool to calculate the price of an Option on the basis of various influencing factors like the price of the underlying and its volatility, time to expiry, risk free interest rate etc.
Developmental institutions, Mutual Funds, FIs, FIIs, Brokers, Retail Participants are the likely players in the Options Market.
Besides offering flexibility to the buyer in form of right to buy or sell, the major advantage of options is their versatility. They can be as conservative or as speculative as one's investment strategy dictates.
High leverage as by investing small amount of capital (in form of premium), one can take exposure in the underlying asset of much greater value.
If you anticipate a certain directional movement in the price of a stock, the right to buy or sell that stock at a predetermined price, for a specific duration of time can offer an attractive investment opportunity.
Option is a contract which has a market value like any other tradable commodity. Once an option is bought there are following alternatives that an option holder has:
The risk/ loss of an option buyer is limited to the premium that he has paid.
The risk of an Options Writer is unlimited where his gains are limited to the Premiums earned. When a physical delivery uncovered call is exercised upon, the writer will have to purchase the underlying asset and his loss will be the excess of the purchase price over the exercise price of the call reduced by the premium received for writing the call.
Option writing is a specialized job which is suitable only for the knowledgeable investor who understands the risks, has the financial capacity and has sufficient liquid assets to meet applicable margin requirements. The risk of being an option writer may be reduced by the purchase of other options on the same underlying asset thereby assuming a spread position or by acquiring other types of hedging positions in the options/ futures and other correlated markets.
In the Indian Derivatives market, Sebi has not created any particular category of options writers. Any market participant can write options. However, margin requirements are stringent for options writers.
The Stock Index Options are options where the underlying asset is a Stock Index for e. g. Options on S&P 500 Index/ Options on BSE Sensex etc.
Index options enable investors to gain exposure to a broad market, with one trading decision and frequently with one transaction. To obtain the same level of diversification using individual stocks or individual equity options, numerous decisions and trades would be necessary.
Index Options are effective enough to appeal to a broad spectrum of users, from conservative investors to more aggressive stock market traders.
Options contracts where the underlying asset is an equity stock, are termed as Options on stocks. They are mostly American style options cash settled or settled by physical delivery.
Options can offer an investor the flexibility one needs for countless investment situations. An investor can create hedging position or an entirely speculative one, through various strategies that reflect his tolerance for risk.
The equity options traded on exchange are not issued by the companies underlying them. Companies do not have any say in selection of underlying equity for options.
Holder of the equity options contracts do not have any of the rights that owners of equity shares have - such as voting rights and the right to receive bonus, dividend etc. To obtain these rights a Call option holder must exercise his contract and take delivery of the underlying equity shares.
Long term equity anticipation securities (Leaps) are long-dated put and call options on common stocks or ADRs.
Derivatives with more complicated payoffs than the standard European or American calls and puts are referred to as Exotic Options. Some of the examples of exotic options are as under:
Over-The-Counter options are those dealt directly between counter-parties and are completely flexible and customized. There is some standardization for ease of trading in the busiest markets, but the precise details of each transaction are freely negotiable between buyer and seller.
Like stocks, options and futures contracts are also traded on any exchange. In Bombay Stock Exchange, stocks are traded on BSE On Line Trading (BOLT) system and options and futures are traded on Derivatives Trading and Settlement System (DTSS).
The underlying for the index options is the BSE 30 Sensex, which is the benchmark index of Indian Capital markets, comprising 30 scrips.
BSE's first index options is based on BSE 30 Sensex. The Sensex options would be European style of options i. e. the options would be exercised only on the day of expiry.
Specific Portfolio Analysis of Risk (SPAN) is a worldwide acknowledged risk management system developed by Chicago Mercantile Exchange (CME). It is a portfolio-based margin calculating system adopted by all major Derivatives Exchanges.
SPAN identifies overall risk in a complete portfolio of futures and options at the same time recognizing the unique exposures associated with both inter-month and inter-commodity risk relationships.
PC-SPAN is an easy to use program for PC's which calculates SPAN margin requirements at the members' end. How PC SPAN works:
Each business day the exchange generates risk parameter file (parameters set by the exchange ) which can be down loaded by the member.
A portfolio based margining model (SPAN), would be adopted which will take an integrated view of the risk involved in the portfolio of each individual client comprising of his positions in all the derivatives contract traded on the Derivatives Segment.
On Exercise of an Option by an Option Holder, the trading software will assign the exercised option to the option writer on random basis based on a specified algorithm.
An investor has to register himself with a broker who is a member of the BSE Derivatives Segment.
The exchange is conducting free of cost futures and options awareness programs for member brokers and their clients. This will be conducted across the country to reach investors at large.
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• Disclaimer: Futures, option & stock trading is a high risk activity. Any action you choose to take in the markets is totally your own responsibility. TradersEdgeIndia will not be liable for any, direct or indirect, consequential or incidental damages or loss arising out of the use of this information. This information is neither an offer to sell nor solicitation to buy any of the securities mentioned herein. The writers may or may not be trading in the securities mentioned.
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Future trading strategies india pdf.
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3 Replies to “Future trading strategies india pdf”
If the price of gold is below your strike price at expiry, you lose what you paid for the option, called the premium.
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Future trading strategies india

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