1. What are Nifty futures and options?
Nifty futures are a contract that gives its buyer or seller the right to buy or sell the Nifty 50 index at a preset price for delivery at a fu ture date. Nifty options are of two types -call and put options. A call option on Nifty gives a buyer the right, but not the obli gation, to buy the index at a predetermined price during a specified time pe riod. Similarly , a Nifty put gives its buyer the right to sell the index. A seller of the options is obliged to give or take delivery . In practice index futures are cash settled, like their European counterparts.
2. How does a Nifty futures and options contract work?
Suppose A feels Nifty will rise from Friday's close of 7438, she can buy one lot (75 shares) of Nifty by putting up a margin of `45,027. Her counterparty sells Nifty at that level. If Nifty ris es on Monday to, say , 7500, she can buy the in dex at 7438 and sell it to the counterparty at 7500, gaining `4,650, or earn ing a gross return of 10.32%. Similarly , if Nifty falls, the counter party makes 10.32%.
The second way is for A to buy a 7500 call option by paying a premium of `74 (closing price on Friday) per share, or `5550 a lot. If Nifty jumps by 62 points on Monday ,A 's option price will rise by roughly `30 a share, based loosely on the Black Scholes model. That's a gross return of 41%. The seller of the option has to in this case fork out the money. However, the call buyer could also have an unrealised loss if Nifty falls by a similar extent.
3. What's more advantageous buying futures or options?
An option seller has to place a high exposure and Span margin with the exchange that's way above the option price or premium she receives from a buyer. For instance, a buyer of a 7300 call on Nifty pays `14,550 to the seller, but the seller puts up a `53,890 margin with the exchange to earn the premium. However, to buy or sell a futures contract, both buyer and seller put up the same margin, which is around 10% of the contract's overall value. Holding an option for long results, in loss of value due to time decay , which does not happen in case of futures.Unlike options, futures can be rolled over. But, gains and losses in futures can be unlimited. In options losses (for the buyer) are limited to the premium paid (sellers of options are exposed to higher loss of risk though) while profits (buyer) are very high.
4. Where and how can these contracts be traded?
By opening a trading account with a broker demat is not neces sary since these contracts are cash settled. The contracts can be traded on NSE and BSE.
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