Frequently Asked Questions on Future and Options
Options trading is essentially a trade that involves a derivative contract between a buyer and a seller. This contract gives traders the right or the option, but not the obligation to purchase or sell an underlying asset (stocks, commodities, ETFs, currencies, etc.) at a specific price (called the strike price) for a predetermined period. Buyer/sellers may exercise the option to exit the option contract on or before the contract maturity period.
Futures Trading can be defined as the act of trading a derivatives contract featuring underlying assets like shares, currencies, commodities, ETFs, etc. In Futures Trading, traders are obligated to buy or sell the underlying asset on a fixed, predetermined future date, at a fixed, predetermined future price on the contract expiration date. They are obligated to carry out the trade irrespective of the market value of the underlying asset on the trading date and may incur profits or losses accordingly.
In stock market, Futures and Options are derivatives contracts under which traders agree to buy and sell an underlying asset at a fixed date and time in future. A Futures contract is one under which the traders are obligated to buy or sell the underlying asset at a fixed future date, at a fixed future price, irrespective of the asset's market value on the contract expiration date. Under an options contract, traders have the option and not the obligation to honour the contract. This means they can bow out of the contract if the price of the underlying asset on the contract expiration date is not as expected/speculated. They must, however, forfeit the margin amount paid at the time of entering the contract.
In the stock market, Futures are derivatives contracts under which traders trade underlying assets on exchanges. Under the futures contract, traders must buy or sell the underlying asset on a fixed date, also known as the contract expiration date, at a fixed, predetermined price. Traders can speculate and set the underlying assets' prices while entering into the contract. They are obligated to honour the contract rules and buy/sell the asset even if the trade does not pan out per their expectation or speculation on the contract expiry date.
A call option is a derivative contract that allows option buyers the right or option to buy or not buy an underlying asset at the strike price. Per call options basics regulations of the SEBI, investors who buy a call option are not obligated to exercise the option if the trade means incurring a loss. As such, they may choose against purchasing the asset at the strike price. They may also decide when and whether to exercise the option to exit the agreement, but they must do so before the contract expiry period.
The benefits of Futures trading include:
- Traders can leverage the margin trading benefit under which they can buy more units of the underlying asset at a fraction of a cost. This margin essentially serves as a security deposit to cover your losses if your trade does not perform to your expectations.
- You do not need to take the physical delivery of the assets traded and can conduct all trades on paper.
- The futures trading market is highly liquid and active, which means that at any given time, you can find buyers and sellers whenever you wish to conduct a transaction.
- The expense ratios, such as commission charges, entry/exit loads, etc., are typically low in the futures trading market.
The different types of futures contracts traded in India include:
- Equity stock futures
- Equity Index Futures like BSE Sensex, NSE Nifty 50, Nifty Bank, Nifty IT, etc.
- Currency Futures like USDINR Futures, GBPUSD Futures, etc.
- Commodity Futures
- Interest rate futures
- VIX Futures
Margin funding, also known as Margin Trading facility, is a service provided by brokerage firms through which traders can get the necessary funds to buy more units of stocks, currencies, commodities, etc., from their brokers. Essentially, the margin funding facility allows you to buy more units of securities than you can afford by borrowing funds at a nominal interest rate from your broker. You can get the funds by using your shares as collateral, and you must repay or square off the amounts funded by a specific period.
You can check the NSE F&O stock list and eligibility criteria by visiting the website of the National Stock Exchange and following this path - Products & Services > Derivatives > Equity Derivatives > Products. Similarly, you can find the BSE F&O stock list and eligibility via the Bombay Stock Exchange website. Click on Markets on the BSE Home Page and select Derivatives to view the BSE F&O stock list. You can also find these details through your Mirae Asset Derivatives Trading account.
Using the F and O margin calculator, also known as the span margin calculator, is easy. You can use any online F&O calculator and follow these steps:
- Use the drop-down menu Select the Exchange wherein the underlying F&O asset is traded.
- Select the Product type (from Futures and Options) from the next tab in the drop-down menu.
- Enter the company name/ Ticker Code/Symbol in the third tab.
- Enter the quantity and choose whether you want to buy or sell the contract.
- Click on Calculate. You can also reset the calculator if you wish to change the quantity or calculate the value of other F&O contracts.