How to trade in Options and futures in National Stock Exchange?
Before we understand how to trade in options and futures in NSE first understand what are options and futures.
Options in Stock Market
Option is not an obligation but right to buy or sell the shares. Suppose you buy a option, that means you get an optional right to buy the shares. There is no obligation that you have to compulsoty buy the option. But if excercise your right, seller has to compulsory sell the shares.
How options work?
Suppose, Reliance is currently trading at Rs. 1000 and you want to buy it after 2 months and you believe that reliance will go upto 1150. You can buy the option of reliance at 1050 in premium. If reliance goes to 1150, you make profit other loss is limited to your premium.
Futures in Stock Market
Futures are different than options. In options you have the option but in futures you have to compulsory square off the position. If you buy some share, you have to compulsory sell your shares on expiry date.
Which is better options or Future?
From the risk point of view, options are better because your risk is limited to premium you paid. In future loss can be unlimited. Suppose you bought a share at 100 and it went to 200 you have to take the loss of 100 per share in futures. But in case of options the loss is limited to your premium paid.
How to make profit in Option and Futures?
If you trade in cash market, i mean buying an selling the shares in cash (deliverable) then the margin is required is high. But, if you trade in options the margin is very low.
Profits can be made by arbitrating in option. If you buy a call option, also buy a put option. You will not be in loss whether share prices goes up or come down. In case share prices goes up you make money in call and if share prices come down you make money in put.
Advice to new traders is that in begining dont bring too much money. In options with 20,000 you can trade a lot. If you play well your 20,000 can give you a profit of 20 lakhs.
A really good post for those who want to start trading in stock markets. What are the benefits in terms of brokerage if we trade in options and futures, is brokerage high or low compared to trading in equities?
Brokerage is lower in case of options. Options are traded in lots. You dont buy one or two shares but in the predefined numbers. These units are called lots. Brokerage is normally 50 Rs, but will be lowered based on volume of trading you do.
Reliance has a lot of 250 shares. If you buy 250 shares in equities the brokerage will be more than 250-300 Rs, with options you pay only 50 Rs.
However if you want to hold for long time then you have to buy equities only since option have maturity period of 1 month only. The last thrusday of each month is the settlement day, where you have to surrender you options.