In Stock Exchanges, there are Spot Markets and Derivative Markets. In Spot market, we can trade and settle on the same day.
In Derivative markets, Futures and Options are traded in Stocks and Indices.
Futures contracts allow a person to speculate on the direction of the market. Here, both parties have to pay margin, in order to facilitate MTM on daily basis. It has a fixed date of Expiry and the contract is valid till expiry date only. trading Futures are easy when compared to Options Contracts.
Option contracts have Call Options and Put Options. It is further sub divided into Four categories such as Call buying, Call selling, Put Buying and Put Selling.
In case of call buyers and Put Buyers, they have to pay Premium to call sellers.
Option Buyers have unlimited profit with limited risk of paying premiums.
Option sellers have only receipt of premium only, but they have unlimited risk, if the market moves in the direction of option Buyers.
Options have both physical settlement as well as cash settlement.
All contracts of Derivatives expire on the expiry date and have no value after expiry date.
Nifty, an Index of NSE could be traded in Futures and Options only. It can not be traded in Cash market, as it has no asset like share certificates.
- : Spot market and cash market are one and the same. In spot market, settlement is done on the same day. That is when you buy shares, asset will be transferred on the same day and if you sell shares, cash equivalent of share value will be settled on the same day.
- : The Exchange plays a major role in Derivative trading of Futures, by collecting caution deposit from the parties concerned and facilitates the trade. In call options, it collects Premium from the Buyer and facilitates the trade. The premium so collected is due for sellers.
- : Margin: It is meant for futures trade. You need not pay entire amount of the Futures value, but pay a small portion of it as margin and participate in trade. both parties have to pay margin amount. MTM: In futures trade the profit and loss is settled on the same day itself by making mark to market. Premium: It is the amount, the option buyers have to make to sellers for getting the Options contract signed by the seller. Strike price: It is the price at which the contract is signed for both call and put options. Premium varies for each strike price. Expiry date: The date on which the contract expires. Lot size: It varies from one stock to another stock, like, 25, 40, 300, 6000 etc. It is not fixed for all stocks.
- : Option Contract: There are four variants like Buy Call, Buy Put, Sell call and Sell Put. Call Option Buyers have to pay Premium to call Option Sellers. Call option Buyers have the right to buy the shares on Expiry from Call option sellers, when option is exercised. Also, Put option buyers have the right to sell shares to Put option Sellers on expiry, when option is exercised. On expiry, it could be asset settled or cash settled. Futures Contract: Here both buyers and sellers have to pay Margin money to facilitate MTM on daily basis. On expiry, it is cash settled. All contracts of Futures and Options expire on the date of Expiry. After expiry date, the options have no value.
- : Call option: It has two variants Call Buy and call sell. Call buyers have to pay premium to call sellers. Call buyers have the right to buy, when contract is exercised on the day of expiry, but not under obligation to buy. Option buyers have unlimited profits and option sellers have unlimited loss. It applies to both call sellers and Put sellers. Put Option: It has two variants Put Buy and Put sell. Put buyers have to pay premium to Put sellers. Put buyers have the right to sell, when contract is exercised on the day of expiry, but not under obligation to sell. Option buyers have unlimited profits and option sellers have unlimited loss.
- : Futures Contracts are derivative contracts which obligates the parties to transact an asset at a future date and price.
- : Futures allows a trader to speculate on the direction of a security. He need not purchase the actual security, but get immediate profit and loss instantly. Call Options: Buying calls involve payment of premium. Option buyer has the right to buy the asset on expiry. Put Options: Buying Puts involve payment of premium. Option buyer has the right to sell the asset on expiry. Both call option buyers and Put option sellers receive premium only.
- : Nifty is an Index of top 50 companies in NSE. So, there is no spot trading. But, it could be traded in Futures and Options in Derivatives market. It has only cash settlement on expiry.
- : Physical Settlement: On expiry, physical settlement takes place in Stock Options Contracts and Stock Futures Contracts. Cash Settlement: On expiry, cash settlement takes place in Index Futures and Index Options.
- : How MTM is deducted in Options contract?