- Futures and options are common derivatives contracts used by hedgers and speculators on a wide range of underlying securities.
- Futures have various advantages over options, including being easier to comprehend and value, allowing for wider margin use, and being more liquid.
- Even yet, futures are more complicated than the underlying assets they track. Before you trade futures, be sure you’re aware of all the hazards.
Which is more secure: the future or the options?
While options are risky, futures are even riskier for individual investors. Futures contracts expose both the buyer and the seller to maximum risk. To meet a daily requirement, any party to the agreement may have to deposit more money into their trading accounts as the underlying stock price moves. This is due to the fact that gains on futures contracts are automatically marked to market daily, which means that the change in the value of the positions, whether positive or negative, is transferred to the parties’ futures accounts at the conclusion of each trading day.
Futures or options produce more profit?
If a ‘At The Money’ call option is purchased for Rs 171, the call will be priced at Rs 278 on the fifth day, representing a 200-point increase. The call option was purchased for Rs 12,825 with a return of Rs 8,025 (62.5 percent ROI). The profit is significantly more than simply purchasing a future.
Let’s pretend that instead of moving up 100 points as in the previous case, the instrument travels down 100 points. The futures payment is a loss of Rs 7,500 (-12.5 percent ROI), while the call option is priced at Rs 111, a loss of Rs 4,500. (-35 percent ROI).
Futures have no profit or loss if the underlying does not move at all, whereas options price will decrease to Rs.157, resulting in a loss of Rs 1,050. (-8 percent ROI). Theta decay is to blame for this loss (Time value).
We can see from the instances above that buying options can increase returns on both sides, but this isn’t always the case. Buying Options might provide a larger ROI if the trader’s conviction in the trade is too high.
Buying options has a large impact on ROI in the situation of Low Confidence, but it also limits the loss in absolute terms less than futures with upside potential. Futures, on the other hand, may be a better option if confidence is neutral.
Nifty futures or options: which is better?
Futures will generate higher earnings if you are absolutely persuaded about a path. 3. The lot size for Nifty futures is currently 50, and the lot size for Nifty options is also 50. If the Nifty lot size changes, it will affect both futures and options, but it will always be the same.
When is the best time to buy futures and options?
Purchasing options allows you to profit from the movement of futures contracts for a fraction of the price of purchasing the actual future. If you think the value of a future will rise, buy a call. If you think the price of a future will fall, buy a put. The premium is the cost of purchasing the option.
Do futures carry more risk than options?
Futures and options are both derivatives and leveraged instruments, making them riskier than stock trading. Because both derive their value from underlying assets, the profit or loss on these contracts is determined by the price movements of the underlying assets.
While your risk tolerance is an important consideration, the ultimate conclusion is that futures are riskier than options. On the same amount of leverage and capital commitment, futures are more sensitive to minor fluctuations in the underlying asset than options. They become more volatile as a result of this.
Leverage is a two-edged sword: it allows an instrument to profit quickly while also allowing it to lose money quickly. When compared to trading options, futures trading can make you as much money as it can potentially lose you.
When you buy put or call options, your maximum risk is limited to the amount you put into the options. If your guess is completely wrong and your options expire worthless, you’ll lose money, but not more than you invested.
Futures trading, on the other hand, exposes you to unlimited risk and requires you to keep track of your investments “A margin call is when you “top up” your daily losses at the end of the day. As long as the underlying asset is sailing against the wind, your daily loss will continue. If you put all of your money into a futures contract and don’t have enough money to meet the margin calls, you could end yourself in debt.
Even yet, futures aren’t technically correct “Riskier” refers to the opportunity to use a higher level of leverage, which increases both profit and risk. Stocks can be purchased on margin with a 5:1 leverage. Futures can give you a leverage of 25:1, 50:1, or even greater, so even minor changes can result in big gains or losses, depending on your investment.
What Makes Options Better Than Stocks?
- Options can generate extremely high profits in a short period of time by leveraging a relatively modest sum of money into many times its worth.
- While stock prices are unpredictable, option prices can be much more so, which is one of the things that attracts traders to the possibility of profit.
- Options are inherently dangerous, but some options methods can be low-risk and even help you outperform the stock market.
- Owners of options, like stockholders, can benefit from the potential upside if a stock is purchased at a premium to its value, but they must buy the options at the proper time.
- Options commissions have been slashed by major online brokers, and a few firms even allow you to trade options for free.
- Options are liquid, which means you may sell them for cash at any moment the market is open, though there’s no assurance you’ll get back the amount you spent.
- Longer-term options (those held for at least a year) may qualify for lower long-term capital gains tax rates, however they aren’t available on all stocks.
Disadvantages of trading in options
- Not only must your investment thesis be correct, but it must also be correct at the right time. A rising stock after an option’s expiration has no bearing on the option.
- Options prices change a lot from day to day, and price moves of more than 50% are frequent, which means your investment could lose a lot of money quickly.
- You may lose more money than you invest in options depending on how you use them.
- Options are a short-term vehicle whose price is determined by the price of the underlying stock, making them a stock derivative. If the stock moves unfavorably in the short term, it can have a long-term impact on the option’s value.
- Options expire, and the opportunity to trade them is gone once they do. Options can lose value and many do but traders can’t buy and keep them like stocks.
- Options may be more expensive to trade than stocks, but there are no-cost options brokers available.
Is it possible to sell futures before they expire?
Purchasing and selling futures contracts is similar to purchasing and selling a number of units of a stock on the open market, but without the need to take immediate delivery.
The level of the index moves up and down in index futures as well, reflecting the movement of a stock price. As a result, you can trade index and stock contracts in the same way that you would trade stocks.
How to buy futures contracts
A trading account is one of the requirements for stock market trading, whether in the derivatives area or not.
Another obvious prerequisite is money. The derivatives market, on the other hand, has a slightly different criteria.
Unless you are a day trader using margin trading, you must pay the total value of the shares purchased while buying in the cash section.
You must pay the exchange or clearing house this money in advance.
‘Margin Money’ is the term for this upfront payment. It aids in the reduction of the exchange’s risk and the preservation of the market’s integrity.
You can buy a futures contract once you have these requirements. Simply make an order with your broker, indicating the contract’s characteristics such as theScrip, expiration month, contract size, and so on. After that, give the margin money to the broker, who will contact the exchange on your behalf.
If you’re a buyer, the exchange will find you a seller, and if you’re a selling, the exchange will find you a buyer.
How to settle futures contracts
You do not give or receive immediate delivery of the assets when you exchange futures contracts. This is referred to as contract settlement. This normally occurs on the contract’s expiration date. Many traders, on the other hand, prefer to settle before the contract expires.
In this situation, the futures contract (buy or sale) is settled at the underlying asset’s closing price on the contract’s expiration date.
For instance, suppose you bought a single futures contract of ABC Ltd. with 200 shares that expires in July. The ABC stake was worth Rs 1,000 at the time. If ABC Ltd. closes at Rs 1,050 in the cash market on the last Thursday of July, your futures contract will be settled at that price. You’ll make a profit of Rs 50 per share (the settlement price of Rs 1,050 minus your cost price of Rs 1,000), for a total profit of Rs 10,000. (Rs 50 x 200 shares). This figure is adjusted to reflect the margins you’ve kept in your account. If you make a profit, it will be added to the margins you’ve set aside. The amount of your loss will be removed from your margins if you make a loss.
A futures contract does not have to be held until its expiration date. Most traders, in practice, exit their contracts before they expire. Any profits or losses you’ve made are offset against the margins you’ve placed up until the day you opt to end your contract. You can either sell your contract or buy an opposing contract that will nullify the arrangement. Once you’ve squared off your position, your profits or losses will be refunded to you or collected from you, once they’ve been adjusted for the margins you’ve deposited.
Cash is used to settle index futures contracts. This can be done before or after the contract’s expiration date.
When closing a futures index contract on expiry, the price at which the contract is settled is the closing value of the index on the expiry date. You benefit if the index closes higher on the expiration date than when you acquired your contracts, and vice versa. Your gain or loss is adjusted against the margin money you’ve already put to arrive at a settlement.
For example, suppose you buy two Nifty futures contracts at 6560 on July 7. This contract will end on the 27th of July, which is the last Thursday of the contract series. If you leave India for a vacation and are unable to sell the future until the day of expiry, the exchange will settle your contract at the Nifty’s closing price on the day of expiry. So, if the Nifty is at 6550 on July 27, you will have lost Rs 1,000 (difference in index levels – 10 x2 lots x 50 unit lot size). Your broker will deduct the money from your margin account and submit it to the stock exchange. The exchange will then send it to the seller, who will profit from it. If the Nifty ends at 6570, though, you will have gained a Rs 1,000 profit. Your account will be updated as a result of this.
If you anticipate the market will rise before the end of your contract period and that you will get a higher price for it at a later date, you can choose to exit your index futures contract before it expires. This type of departure is totally dependent on your market judgment and investment horizons. The exchange will also settle this by comparing the index values at the time you acquired and when you exited the contract. Your margin account will be credited or debited depending on the profit or loss.
What are the payoffs and charges on Futures contracts
Individual individuals and the investing community as a whole benefit from a futures market in a variety of ways.
It does not, however, come for free. Margin payments are the primary source of profit for traders and investors in derivatives trading.
There are various types of margins. These are normally set as a percentage of the entire value of the derivative contracts by the exchange. You can’t purchase or sell in the futures market without margins.
Is it possible to hold Nifty options?
In intraday (MIS) transactions, all strikes of Nifty and Banknifty options are permitted. Because of the market-wide Open Interest (OI) limits imposed by SEBI regulations, certain strikes are not available for overnight (NRML) trades.
Is it possible to keep Nifty Futures?
Because the Nifty is fairly indicative of the market and the economy in general, investing in Nifty futures is a typical proxy for trading the market as a whole. Nifty futures are simply Nifty futures contracts. The Nifty’s minimum lot size is 75 units, putting the lot value at just over Rs.7.50 lakhs. What are the best strategies for trading Nifty futures and how do you trade Nifty futures? Let’s go over some key points to keep in mind as we learn how to trade Nifty futures intraday and in the long run.
Futures typically trade at a discount to spot prices. The monthly spread over the spot price is established by the current cost of funds under normal circumstances. Futures typically quote at a premium to the cost of carry, which is also known as the cost of carry. There are two things to keep in mind here. If Nifty futures are trading at a significant premium over the spot index, it could be a sign of overpricing and overconfidence. Also, don’t buy when the Nifty futures are trading at a discount, as this could indicate strong futures selling. Before trading Nifty futures, you need understand the spread’s logic.
Nifty futures, like all futures contracts, are leveraged. Your margin is roughly 10% for normal trading and 5% for MIS (intraday) deals when you buy one lot of Nifty in the next month. That means a conventional trade is 10 times leveraged, whereas intraday trades are 20 times leveraged. This is true in both directions. Profits can be multiplied by leverage, but losses can be multiplied as well. As a result, any trading in Nifty futures must follow rigorous stop-loss and profit-target guidelines.
Before buying Nifty futures, it’s always a good idea to undertake some scientific data research. A brief examination of the Nifty futures open interest and accumulation trends will reveal if the open interest is rising on the long or short side. You can gain a better understanding of the Nifty’s direction.
Because the Nifty futures is one of the most liquid products, liquidity is never a huge issue, but there are times when the Nifty futures might get you into a liquidity bind. To begin with, after the rollovers are significantly finished on the expiry day, the volumes on the Nifty futures usually vanish. Furthermore, in a market that is rapidly declining, spreads can widen dramatically, increasing your risk when trading Nifty futures.
Buying or selling Nifty futures is a linear position since it can result in endless profits and losses on both sides. When trading the Nifty, stop losses are essential, but one must also be aware of the margins. To begin, you must pay an initial margin, which includes the VAR and ELM margins, at the time of taking the position. Brokers must now collect both of these margins, and ELM is no longer an option. Second, you must pay MTM (mark to market) margins based on price change on a daily basis. These have an impact on your capital allocation.
Even if you place stop losses throughout the day, they will not cover the danger you face overnight. What do you do, for example, if you are long on Nifty Futures and the Nifty drops 200 points on opening owing to a Dow crash? Stop losses don’t operate in Nifty futures, so you’re exposed to overnight risk.
This is an intriguing feature of trading Nifty futures. When you buy Nifty futures, another party is selling, and when you sell Nifty futures, the same rationale applies. The other party could be a trader or a hedger, and open interest data will provide you with the information you require. While your Nifty view is typically what drives you, it is always beneficial to comprehend the opposing view because it can help you clarify your Nifty vision. When dealing in Nifty Futures, there are eight factors to keep in mind.
When trading Nifty futures, keep in mind that you are risking real money, thus three factors are crucial. For starters, futures do not pay dividends, hence dividends cause futures to trade at a discount. Consider this when making a decision. Second, there are brokerage and statutory charges to consider when trading Nifty futures. This has an impact on your breakeven point. Finally, because Nifty futures are classified as securities for tax purposes, any profit or loss will be treated as a capital gain or loss, with the corresponding tax implications.
Can we get alternatives delivered?
If you own a stock futures or stock option contract that ends in the money on expiry day, you must deliver the entire contract value of the underlying stock.