Futures and Options are popular financial derivatives that allow investors to hedge their positions, speculate on price movements, and manage risk effectively. Both instruments derive their value from an underlying asset such as stocks, commodities, indices, or currencies.
Why Futures and Options Are Hugely Traded
- Leverage: Futures and options allow traders to control large positions with a relatively small margin, amplifying potential returns.
- Hedging: They are widely used for risk management to protect investments from adverse price movements.
- Liquidity: High liquidity in futures and options markets ensures smooth execution of trades with minimal slippage.
- Flexibility: These derivatives allow traders to employ various strategies, including bullish, bearish, and neutral stances.
Stock Options vs. Index Options
- Stock Options: These are options contracts based on individual stocks. For example, buying a call or put option on TCS or Reliance Industries.
- Offers exposure to specific company performance.
- Risk is tied to the specific stock’s volatility.
- Index Options: These are options based on a stock market index, such as the Nifty 50 or Bank Nifty.
- Represents broader market sentiment.
- Lower volatility compared to stock options as indices are less affected by single-stock movements.
Key Greeks: Theta and Gamma
- Theta: Measures the time decay of an option’s value. As the expiration date approaches, the time value of options decreases, particularly for At The Money (ATM) options.
- A higher theta indicates faster time decay.
- Buyers are negatively affected, while sellers benefit.
- Gamma: Measures the rate of change of delta relative to the price of the underlying asset. High gamma indicates significant changes in delta for small movements in the underlying asset.
- High near expiration or for ATM options.
ATM, ITM, and OTM Explained
- At The Money (ATM): The strike price is close to the current price of the underlying asset. ATM options have the highest time value.
- In The Money (ITM): The strike price has intrinsic value. For calls, the underlying price is above the strike price, and for puts, it’s below.
Out of The Money (OTM): The strike price has no intrinsic value. For calls, the underlying price is below the strike price, and for puts, it’s above.
What Is an Option Chain?
An Option Chain is a tabular representation of all available option contracts for a given underlying asset, showing details such as:
- Strike prices
- Bid/ask prices
- Open interest
- Implied volatility
- CE (Call Options) and PE (Put Options)
The option chain helps traders identify trading opportunities based on market sentiment, liquidity, and risk-reward ratio.
What Are CE and PE?
- CE (Call Option): A contract giving the buyer the right, but not the obligation, to buy the underlying asset at a specified price before expiration.
PE (Put Option): A contract giving the buyer the right, but not the obligation, to sell the underlying asset at a specified price before expiration.
Depositories in India
India has two depositories:
- NSDL (National Securities Depository Limited)
- CDSL (Central Depository Services Limited)
These institutions hold securities in dematerialized form, facilitate transfers, and ensure efficient settlement of trades.
Average Price per Lot in Discount Broker Platforms
The average margin requirement per lot varies depending on the underlying asset and the broker. On discounted broker platforms in India:
- Equity Stock Options: ₹5,000–₹20,000 per lot.
- Index Options: ₹3,000–₹15,000 per lot.
Discount brokers like Zerodha, Upstox, and Groww offer competitive pricing, making derivatives accessible to retail traders.
