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Pritam P Hans Print Edition: May Are you quite positive about the future returns of a particular scrip that you have been tracking? It may be the case that you have money to buy just shares of this company, when you actually want to buy 1, Don't settle for less-invest in equity derivatives instead.
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You will need to invest just a fraction of the value of the stocks upfront. Derivatives are instruments whose value is based on the future prospects of the underlying stocks or indices.
You have to deposit a margin to buy or sell futures or to sell an option. To buy an option, you only deposit a premium," says Shomesh Kumar, head derivativesKarvy Stock Broking.
Video not supported! What is Exercise Price Strike? The strike price is the predetermined price at which you buy in the case of a call or you sell in the case of a put an underlying futures contract when the option is exercised. Strike Price Ranges When trading options you can choose from a range of strike prices that are set at predefined intervals by the exchange.
You can, however, close the deal before maturity by entering into an equal and opposite transaction called 'squaring off'. In contrast, an options contract is more flexible as it grants the holder the right to buy or sell shares on or before a specific date but does not make it mandatory. The buyer enters into a contract with the options writer or the seller, a deal is done at a strike price or the price at which the two parties agree to buy or sell the asset in the future.
The contract-holder can choose to exercise the 'call' option for buying or the 'put' option for selling the shares. But the options writer is obliged to sell or Exercise 100 Points Trading the stock if the option is exercised.
Futures and options contracts are traded through clearing corporations such as National Securities Clearing Corporation NSCCLwhich provide a guarantee in case there is a breach of Exercise 100 Points Trading. Options can also be traded directly on the over-the-counter OTC exchange, but this is seen as risky. So, you do not get delivery of any stocks, and the deal is settled through cash on the expiry date.
Here's how index futures operate. Assume that you are bullish on the market, while the Nifty is trading at 5, points, and you buy 50 units of Nifty futures at a strike rate of Rs 5, This means you are betting that the Nifty will cross 5, by the expiry date of your contract.
If on that date, the Nifty is trading at 5, points, you have made a profit of Rs on each unit or Rs 5, on your investment. If, however, the Nifty falls to 5, you lose Rs 2, Rs 50 x 50 units.
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For index options, let's assume the Nifty is at 5, and you expect it to decline. You buy 50 units of Nifty put option to sell and pay a premium of, say, Rs at the strike rate of Rs 5, On the day of settlement, if the Nifty is trading at 5, points, you gain Rs 50 per unit or Rs 2, If you deduct the premium paid, it comes to Rs 2, In case, the index rises to 5, points, you can choose not to exercise the option. You lose just Rs In the futures market, it is trading at Rs If your prediction comes true, you make a profit of Rs 25 on each share or Rs 25, If you had operated in the spot market, you may have been able to buy just shares of the scrip for Rs 20, and earned just Rs 7, See Profit Potential.
An alternative would be to buy a call option for the stock and exercise it when the share crosses your target. Let's now assume that you expect a particular share trading at Rs per share and expect it to decline to Rs You place a put option or buy the right to sell shares of this stock after a month.
At a strike rate of Rs for a premium of Rs 5 per share, your investment comes to Rs If the share price actually declines to Rs 80, you buy the share from the cash 100 strategy on binary options and sell it to the option writer for Rs As you have paid a premium of Rs 5 per share, your profit per share will be Rs For shares, your profit will be Rs 1, Rs less Rs You lose just Rs if the shares do not decline It is this profit potential that has made the average daily turnover in the derivatives market grow from Rs 11 crore inwhen it came into existence, to around Rs 1.