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It is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. One needs to have sufficient margin in his account to create a future position. It can be either in the form of cash or collateral. A margin is charged to both the buyer and the seller as they carry unlimited risk.

There are two positions a futures trader can take; a long futures position or a short futures position.

Long futures : A trader takes a long futures position when he expects the markets to go up. If the markets move in the direction of the position taken, he would make money. If not, he would lose money

Short futures : A trader takes a short futures position when he expects the market to fall. If the market goes down, he would make money. If the market goes up, he would lose money.

 

Example of futures trading:

Mr. Sharma buys a futures contract on the exchange which entitles him to receive 100 shares of ABC Industries after three months at a price of Rs 350 per share. The counter-party to the contract, Mr. Tripathi has an obligation to deliver the 100 shares of ABC after three months and receive Rs 350 per share. Let’s assume the current market price of ABC is Rs. 350, we could have three situations tomorrow

• The price moves up to Rs 360 per share. This means Mr. Sharma would be in profit of 10 points
• The price falls to Rs 340 per share. This means Mr. Tripathi would be in profit of 10 points
• The price remains unchanged at Rs 350 per share. In this case, neither Mr. Sharma nor Mr. Tripathi will have to pay or receive anything.

An option is a financial derivative that represents a contract sold by one party (the options writer) to another party (the option holder)

The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price (strike price) during a certain period of time on a specific date (expiration date).

Unlike in the case of futures where the loss one can incur is unlimited. If one buys an option, the maximum loss he will have to incur in case the trade goes against him will be the premium paid, while the profits he can earn is unlimited. When one sells an option, the possible loss incurred can be unlimited, the profit, however will be limited to the premium received.

The Premium could be anything that a strike commands. Even if I have, say, Rs 1000, I can still participate in the market by buying an option, but the same will not be possible in the case of Futures.

It gives the buyer the right, but not the obligation, to buy a given quantity of the underlying asset at a given price at a future date. A trader who expects the markets to go up, will buy a call option. The maximum loss the buyer of an option could incur would be the premium paid, however, the profits can be unlimited. When a trader sells an option, his loss can be unlimited, however, his profits would be limited to the premium received

It gives the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on a given date. A trader who expects the markets to go down, will buy Put options. The maximum loss the buyer of an option could incur would be the premium paid, however, the profits can be unlimited. When a trader sells an option, his loss can be unlimited, however, his profits would be limited to the premium received.

Transfer of risk:

Derivatives help a risk averse trader transfer his/her risk to a risk taker.

Lower transaction costs:

The cost of trading in derivatives is comparatively lower than other segments.

High leverage:

The capital required for taking positions in derivative instruments is generally much lesser as compared to the capital needed to take positions in the stock markets.

One can leverage the existing stocks and post deducting the haircut, one and can trade in derivatives against the limit generated. We don’t charge any interest on such trades. In the case of Futures, only 20%-40% of the total contract value is required to start trading under normal conditions, whereas, in Options, only the premium amount is required in order to buy an Option

Index and Stock

Margins can vary from stock to stock. Margins are prescribed by exchanges and the same needs to be maintained during the course of holding the future contract. If at any given point of time the margin is less than the prescribed margin by the exchange, then the exchanges levies a penalty from the client.

The buyer of an option only pays a premium. For an option buyer the maximum loss can be the premium paid, however, profits can be unlimited.

The Writer or Seller of an option pays a margin. Generally, it’s the same as a future contract. The loss an option seller can incur could be unlimited, however, the profits are limited only to the extent of the premium received.

Initial margin includes Span margin + Exposure Margin + Delivery margin

Span Margin: Span margin is the minimum margin blocked in order to trade in Future or to sell Options

Exposure Margin: It is the margin required over and above span margin to cover MTM

Delivery margins are levied on the lower of potential deliverable positions or in-the-money long option positions, four days prior to the expiry of a derivative contract which has to be settled through delivery.

Delivery margins at the client level shall be computed as per the margin rate applicable in the Capital Market segment (i.e VAR, Extreme Loss Margins) of the respective security. Delivery margins shall be levied at the client level and collected from the clearing member in a staggered manner as under

 

Days to Expire	Delivery Margin
Expiry – 4 EOD	10% of Delivery margin computed
Expiry – 3 EOD	25% of Delivery margin computed
Expiry – 2 EOD	45% of Delivery margin computed
Expiry – 1 EOD	70% of Delivery margin computed

 

Example - If the expiry of a derivative contract is on Thursday, then the delivery margins on the potential in-the-money long option position shall be applicable from the end of trading day of the preceding Friday.

Is the margin same for all contracts? – No. Margins differ from stock to stock. It depends on the volatility of the stock. Higher the volatility, greater the margin

How is margin charged by one电竞(新疆)在线登录 Securities Limited? – Margins charged by one电竞(新疆)在线登录 Securities are as prescribed by the exchange.

Can I use my shares as pledge? – Yes. The existing portfolio can be used to trade in F&O without any interest charges, however “X” haircut is applicable post which you can trade with the limit generated


What is the interest charged when I use my shares as pledge ?– We don’t charge any interest when you use your shares as pledge for fulfilling the margin requirement for buying / selling a future contract and writing / selling an option contract. However, an interest charge is levied in case there is a deficiency or margin shortfall. 

Yes. Such a position is liable for penalty and the penalty charged is as follow:

Three contract months are available for trading:

Current / Near month – The month in which the expiration date is closest to expiry (the last Thursday of every month). Trading is usually most active in the current month

Mid month – Mid month is the month after the current/near month. Trading is usually less active compared to trading in the current/near month.

Far month – This is the third month to the current/near month. Trading or volume is much lower as compared to current or mid-month.

MTM is a simple accounting adjustment. The process involves crediting or debiting the daily obligation money in your trading account based on how the futures price behaves. The previous day closing price figure is considered to calculate the current day’s MTM. If the stock becomes highly volatile, then there is an increase in margin. The margin blocked by the broker at the time of initiating the futures trade is called the initial margin. Both the buyer and the seller of the futures agreement will have to deposit the initial margin amount.

Mark to Market (MTM) is calculated on daily basis at closing price of a contract. For example: If you buy ABC future contract @ Rs. 100 (2000 lot size)

Day 1 Closing	103	+3 (profit)
Day 2 Closing	107	+4 (profit)
Day 3 Closing	102	-5 (loss)
NET DIFFERENCE (PROFIT or LOSS)		+2 (profit)

 

If on expiry, the trader does not close or rollover the future position, such a position would become liable for physical settlement. The trader will have to give or take delivery of this position to the extent of the lot size. In case of options, only in-the-money options are liable for physical settlement

If the position is not squared off, the trader will be charged delivery brokerage

If a trader doesn’t close such a position, he/she will be charged as per the brokerage rate charged for the equity segment by way of JV posting in the ledger. However, the same will not reflect on the contract note.

All the stocks under F&O get physically settled. However, Index contracts are not part of the physical settlement.

WRT Futures:

Spot Price:  The price at which an underlying asset trades in the spot market.

Futures Price:  The price at which the futures contract trades in the futures market

Expiry Date:  The last date on which the contract will be traded, at the end of which the contract  will cease to exist (Last Thursday of the month in Equity derivative in India)

Contract Size:  The number of shares that has to be delivered under one contract. For instance, contract size of Nifty futures is 75.

WRT Options:

Option Price:  It is the price which the option buyer pays to the option seller. It is also referred to as the 'option premium'

Strike Price:  It is the predetermined price at which a specific derivative contract can be bought or sold

Expiration Date & Lot size:  Options have the same expiry date and lot size as of the futures contract

 

Intrinsic Value:  It is the difference between the strike price and spot price

Time Value (Theta):  It is the rate of decline in the value of an option over time

In The Money (ITM):  Indicates that an option has intrinsic value,  

• ITM Call option = Strike price < Spot price
• ITM Put option = Strike > Spot price

Out of The Money (OTM):  Indicates that an option does not have intrinsic value  

• OTM Call option = Strike price > Spot price
• OTM Put option = Strike price < Spot price

At The Money (ATM):  An option is said to be ATM when strike price = spot price.