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• Derivatives act as a good hedging tool against price volatility.
• You can take a high exposure on a stock or security by paying a small margin. For example: If the stocks are priced at Rs 10 lakh and you have only Rs 2 lakhs in hand, this product will still help you take a position.
• Derivatives offer huge time leverage, which is a big plus for traders who do margin trading.
• You can hold the position for 3 months. Normal margin product- 1 day, E-Margin product T+2 days.

• Futures: In futures trading, it is the owner responsibility to buy or sell a contract at a pre-defined time and price. Here, there are standard conditions to follow.
• Forward: It is the owner’s responsibility to buy or sell a contract at a pre-defined time and price. However, it the conditions can be customised between the buyer and seller.
• Options: In options trading, the owner has the option to buy or sell something at a pre-defined price and time.
• Swap: Swap is an agreement of barter or exchange of a sequence of cash flows between two parties.

Futures Contract is a contract to buy or sell pre-defined quantities of an instrument at a specified price and time.

• Future contract has standardised conditions such as price, quantity and time.
• The owner of the contract has the obligation to buy or sell in future.
• Price is determined by supply and demand factors in secondary market.
• Index futures was the financial derivative launched in India.
• Every contract expires on last Thursday of the expiry month.

Spot Price: the trading price of the asset in the spot market.

Future price: the price of future contracts in futures market.

Contract Cycle: Validity period for trading in contracts.

Contract Size: Amount of the asset to be delivered in specified time.

Expiry date: The date on which validity of contract ends.

Initial Margin: Amount to be deposited in margin account to start trading.

Maintenance Margin: Minimum amount to be maintained for trading.

Cost of Carry: Storage cost plus interest paid to finance the asset.

Mark to Market: Adjustments (Profit or Loss) made to investor’s margin account based on future closing price.

In terms of Underlying Asset

- Index Futures

- Stock Futures

In terms of Expiry

- Near Month

- Next Month

- Far Month

Example:

You buy 1 contract of Nifty Futures at Rs 9000

Total contract value is 9000 x 75 (Size of the Lot) = Rs.6,75,000.

Margin is approximately 15%.

This means you pay only Rs.1,01,250 and get control of the contract worth Rs.6,75,000.

If Nifty moves to 9300, you make a PROFIT of Rs 300 (9300-9000)

Total profit is 300 x lot size of 75 = 22500.

You earn a return of 22.2% (15000/40500) x 100 even as nifty moved only 3.33%.

- The owner has an option to buy or sell the contract at a pre-defined price.

- Purchaser of option has to pay something for this contract - in form of a premium.

- You can sell/write options and receive an option premium from the buyer.

- A seller is obliged to sell/buy an asset if the buyer exercises it on him.

TYPES of Options

CALL Option- Right (not an obligation) to BUY the contract.

PUT Option- Right (not an obligation) to SELL the contract.

Index Options – An Index is the underlying asset.

Stock Options – Stocks act as the underlying asset.

Stock Options: A contract which gives buyer the right or buy or sell stocks at pre-fixed price.

Writer: The one who is obliged buy/sell asset if the buyer pays him premium.

Buyer: The one who pays a premium and buys the right (not obligation) to exercise  option on the writer/seller.

Strike Price: Price specified in an Options Contract, which is also called exercise price.

Premium/Option Price: The price a buyer pays to sell/writer of option.

In-the-money option – Brings a positive cash flow to the holder if exercised immediately. A call option is in-the-money if the current market price of underlying asset is higher than strike price.

At-the-money option – Brings zero cash flow if exercised immediately. A call option is at-the-money if current market price of underlying asset equals strike price.

Out-of-the-money option – Brings negative cash flow if exercised immediately. A call option is out-of-the-money if current market price of underlying asset is less than strike price.

Expiration Date: Date specified in the contract, which is also known as strike date or maturity date.

American Options: Options that can be exercised at any time up to expiration date.

European Options: Options, which can be exercised only on expiration date.

Intrinsic Value: is the amount the option is in the money. If the option is OTM or ATM, its intrinsic value is zero.

Time Value: Difference between Premium paid and intrinsic value.

OTM and ATM options have only time value. Longer the time to expiration, greater is an option’s time value. At expiration, an option should have no time value. A contract has maximum time value when it is ATM.

Futures and unlimited profit or loss potential.

Options have limited risk and unlimited profit potential.       

CALL Option- Right (not an obligation) to BUY the contract.

PUT Option- Right (not an obligation) to SELL the contract.

Index Options – An Index is the underlying asset.

Stock Options – Stocks act as the underlying asset.

Example

You buy a stock option by paying a premium of Rs.25.

Lot size is 500, total premium paid is Rs.25 x 500 = Rs.12500.

Current Market Price in cash market is Rs.900.

Now if the stock moves to Rs.1000, option premium would roughly increase to Rs.125.

That translates into a return of 400% as against 11% return in cash market.