Can somebody let me know about futures and options trading?

Question

I'm tracking share market for quite some time(3 yrs actually) but only concentrated on cash segment. Can you let me know about futures and options trading. I don't want to know advantages or drawbacks, but what does it means and how to do it (preferable on 5Paisa.com). If you have any study material on it please mail me at [e-mail]

Answer 1

Quickly and briefly - the easiest way to think about futures and options are with a commodity, such as wheat, but you can do the same thing with busines stocks.

So image you want to buy some wheat. But you don't need the wheat today, you need it in 6 months.

You can buy an "option" to purchase wheat in 6 months, at a fixed price. So, you purchase the option, then in 6 months you can excercise your option to purchase the wheat, at the price you purchased the option at.

But, the kicker is you agreed to purchase a defined quantity of wheat at a defined price. Let's say your option that you purchased for wheat cost $5.67. 6 months from now, if wheat is $8.00, you have a very good and valuable option; since the price of wheat is currently $8.00 and you purchased it for $5.67. However, if wheat is $5.25, your option is essentially worthless.

Because of this, the options can be traded just like the commodity would be traded. You can buy and sell the options up to the point when they expire (all options expire).

To further complicate the issue, you can buy /selloptions to agree to sell or buy a fixed quantity of wheat.

Options to buy a product are called a "Call", and option sell a product are caleld a "Put". Then both put and calls can be traded just like stocks or anything else.

Hope that helps a little. Then, you can get into fancy stuff called straddles and strangles and all kinds of good stuff.

Remember a few years ago when the British Bank -- Bearings, I believe, went under due to a trader in Singapore? That trade was trading (I believe) strangle options agreeing to buy/sell the index of the Japanese stock market.

Answer 2

The best way to explain how futures work is to start with an explaination of an older (and now fairly rare) derivative. A foward contract is an agreement to buy and sell something at a particular date in the future at a set price. The classic example is a farmer who agrees with a miller to sell corn six months from now at a certain price. No money changes hands when the contract is agreed to, only when the corn is actually delivered. Both sides are happy to lock in the price of corn today. Folks in my part of the world sometimes make deals like this for fuel oil to heat their houses, locking in a price for the winter in the fall. The problem with fowards is you can't really make a financial market of them, since each side is taking a credit risk on the other side of the deal. The farmer has to trust that the miller will have the money to pay him and the miller has to trust that the farmer will have the corn. That makes it hard for either party to easily transfer their side of the deal to somebody else. Futures are a modification of fowards that allow an active market. There are two big differences. First, the contracts aren't made with a single counterparty, but with the entire market. So the farmer doesn't sell the corn future to a particular miller but to the entire group of buyers of corn collectively and the market itself guarantees that the cash will be there to make good on the deal. Second, and this is the biggest difference, futures are marked-to-market every day. This means that as the futures price fluctuates each day a payment is made to/from buyers and sellers to settle out the difference. So, for example, if the futures price of corn goes up, then the farmer who sold the futures (or is "short" the contract) pays money and the miller who bought (is "long") the contract recieves money. If the price goes down the opposite occurs. It is important to note the diffference between the futures price of something and the spot price. The two are obviously related, but only on the last or "expiration" day of the futures contract will they be identical. And on that day the final payment will be made to settle out the contract. The actual commodity or whatever that the contract was on does not usually change hands. A futures contract is almost always "cash settled". When you open a futures account with a broker you put up some money for "margin". As you go long or short futures contracts the daily mark-to-market payments will be added/subtracted from this margin. If it gets too low the broker will ask you to come up with more money or to close some of your futures positions, i.e. sell if you are long or buy if you are short.

Answer 3

I cannot help you much with futures, but I do have quite a few years experience with options.

Trading options allows you to adjust the risk and reward factors, increasing or decreasing them as desired. Since you are familiar with shares i would probably make the most sense for you to wtart with options on hem instead of options on futures or indexes.

You need to understand all the implicaions of your trades, something far too complex to give in this forum. I recommend you start at the CBOE learning center at

http://www.cboe.com/LearnCenter/default.aspx

and take their free tutorials and classes. Once you have completed those, if you are still interested, I suggest you read at least one good book on options. Two books I recommend you consider are "Options as a Strategic Investment" by Lawrence McMillon and "Options Volatility & Pricing" by Sheldon Natenberg.

Answer 4

The Standard PG TEXT book is "Futures, Options & Other Derivatives" by Prof.John Hull (University Of Toronto) less than Rs.400- bucks, INDIAN Edition ; Read and get the requisite knowledge prior to risking your capital.

Answer 5

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Answer 6

ex SAIL fut one lot of its future contains 2700 shares if u take one lot of its sept fut @ 182/rs=2700x182=491400 Rs.u have to keep the margin money at least one third of this amount in ur d mat account if share prise goes up to rs 200 ur profit will be rs 18x2700=48600. u must sell this lot in specified time limit sept contract will end 27/09 u can buk profit or buk loss if prises falls within this time period if u dont want to buk loss u can also carry forwd this contract to subsequent months

Answer 7

I was a stock broker for 12 years but I don't know a thing about futures trading....option trading I know a lot about. before you even think of options trading you should have a big pile of money available to you, and you should be ready to lose most of it. options trading is very difficult and things happen very fast. if you don't know what you are doing you will lose all of your money very quickly. even if you know what you are doing, you will lose your money a little slower.

Answer 8

Study the profile of the company, their product, and the feasibility of their product in the market, and the competitors. Then decide what to do.

Answer 9

search derivative FAQ, cnbc site

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