DERIVATIVE MARKET

                Derivatives are financial contracts that derive value from an underlying asset such as stocks, commodities, currencies, etc. They are set between two or more parties, where the value of the derivative is derived from the price or value fluctuations of the underlying assets. Derivatives can be used to hedge a position, speculate on the directional movement of an underlying asset, or leverage holdings.


            There are two types of Derivative Market

  • Futures
  • Options

FUTURES

            A futures contract is an agreement between two parties – a buyer and a seller – wherein the former agrees to purchase from the latter, a fixed number of shares or an index at a specific time in the future for a pre-determined price. These details are agreed upon when the transaction takes place. As futures contracts are standardized in terms of expiry dates and contract sizes, they can be freely traded on exchanges. A buyer may not know the identity of the seller and vice versa. Further, every contract is guaranteed and honored by the stock exchange, or more precisely, the clearing house or the clearing corporation of the stock exchange, which is an agency designated to settle trades of investors on the stock exchanges.

Futures contracts are available on different kinds of assets – stocks, indices, commodities, currency pairs, and so on. Here we will look at the two most common futures contracts – stock futures and index futures.



Common Futures Contracts | Kotak Securities®

      EXAMPLE - Shall we take a natural oil gas(Crude oil)

                                CMP-Current Market Price

If we are buying crude oil at 100 rs the CMP is at 120 rs means its profit 

If we are selling crude oil at 100 rs the CMP is at 120 rs means its loss

Suppose if we are selling crude oil at 100 rs the CMP is at 80 rs means its profit

BUY

SELL

CMP

STATUS

100

 

120

20 RS PROFIT

 

100

 

20 RS LOSS

BENEFITS AND CONDITIONS IN FUTURES

  • Limit is there in futures(Lot Size)
  • Expiry is there(3 months contract)
  • Do on the current month and don't trade in the next month. Eg: Suppose you take some trade in the futures and close it in the same month don't take too much time
  • Margin money-20%. Eg: Don't invest all your money in futures it is a risk. Use 20% of your capital
  • 196 companies in futures
  • No additional benefits in futures

OPTIONS

        Options trading allows you to buy or sell stocks, ETFs, etc. at a specific price within a specific date. This type of trading also gives buyers the flexibility to not buy the security at the specified price or date.
While it is a little more complex than stock trading, options can help you make relatively larger profits if the price of the security goes up. That’s because you don’t have to pay the full price for the security in an options contract. In the same way, options trading can restrict your losses if the price of the security goes down, which is known as hedging.

     The right to buy a security is known as ‘Call’, while the right to sell is called ‘Put’.



  

Call option

Put Option

Public(Buyer

Car-10 lakhs (bought)

Insurance Premium-5000

Insurance company(seller)

Minimum risk and unlimited profit

Minimum Profit and unlimited risk

 

Two types of Option

Call Option

            Call option-Prediction of buy

Key points of options

  • ITM- IN THE MONEY
  • ATM- AT THE MONEY
  • OTM- OUT OF THE MONEY

In the Money - Past

At the Money- Present

Out of the Money-Future

How to calculate the Premium amount

LTP- Last Trader Price

Premium= Lot Size* LPT

          If you want to know about it fully please contact us

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