PRESENTED BY: NAMNEET RISHBHA

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This is the price at which you could buy or sell the underlying futures contract. For example, a December $3.50 corn call allows you to buy a December futures contract at $3.50 anytime before the option expires. Most traders do not convert options, they just close the option position and take the profits.

` Futures can be used either to hedge or to speculate on the price movement of the underlying asset. such as a physical commodity or financial instrument at predetermined future date and price. ` .A financial contract obligating the buyer to purchase an asset (or seller to sell a asset).

By entering into this agreement with the cable company. a producer of wheat may be trying to secure a selling price for next season's crop. in that you have agreed to receive a product at a future date. you have reduced your risk of higher prices. So the farmer and the bread maker may enter into a futures contract requiring the delivery of 5.that can then be bought and sold in the futures market. you enter into an agreement with the cable company to receive a specific number of cable channels at a certain price every month for the next year. You have secured your price for now and the next year .000 bushels of grain to the buyer in June at a price of $4 per bushel. while a bread maker may be trying to secure a buying price to determine how much bread can be made and at what profit. As the buyer. . By entering into this futures contract.and not the grain per se . with the price and terms for delivery already set. . This contract made with the cable company is similar to a futures contract. that you decide to subscribe to cable TV. the farmer and the bread maker secure a price that both parties believe will be a fair price in June. It is this contract .even if the price of cable rises during that time. Except instead of a cable TV provider.` ` Let's say.

quality of the commodity. and the date and method of delivery. SEBI exists to guard against traders controlling the market in an illegal or unethical manner.  . the specific price per unit.Agreement between two parties: a) Short position .the party who agrees to receive a commodity.  Contract specifies: quantity.the party who agrees to deliver a commodity.  Trading in futures is regulated by the Securities & Exchange Board of India (SEBI). and to prevent fraud in the futures market. b) Long position .

000 on a contract and the maintenance margin level is $500. you will be refunded the initial margin plus or minus any gains or losses that occur over the span of the futures contract. This would then prompt the broker to make a margin call to you. the futures exchange will state a minimum amount of money that you must deposit into your account. requesting a deposit of at least an additional $600 to bring the account back up to the initial margin level of $1. . A series of losses dropped the value of your account to $400.000. This original deposit of money is called the initial margin. but the maintenance margin is the lowest amount an account can reach before needing to be replenished. Let's say that you had to deposit an initial margin of $1. When your contract is liquidated.` ` ` When you open a futures contract. the amount in your margin account changes daily as the market fluctuates in relation to your futures contract. The initial margin is the minimum amount required to enter into a new futures contract. In other words.

By selling high now. enters a contract by agreeing to buy and receive delivery of the underlying at a set price .that is.it means that he or she is trying to profit from an anticipated future price increase. Going short: A speculator who goes short . enters into a futures contract by agreeing to sell and deliver the underlying at a set price .that is.` Going long: When an investor goes long . the contract can be repurchased in the future at a lower price.is looking to make a profit from declining price levels. thus generating a profit for the speculator.  .

. Types of spreads: Calendar spread: This involves simultaneous purchase and sell of two futures of same type .having same price. Inter exchange spread: This is any type of spread in which each position is created in different future exchanges. but different delivery dates. Spreading is considered to be one of the most conservative forms of trading in the futures market because it is much safer than the trading of long/short futures contracts.` ` Spreads involve taking advantage of the price difference between two different contracts of the same commodity. Inter market spread: Here the investor . with contracts of same month. goes long in one market and short in other market.

if you buy a futures contract and the price of the stock / commodity goes down you will be required to provide additional margin. The exchange decides whether the futures contract is cash settled or settlement is delivery based .` ` ` ` ` When buying or selling a futures contract we directly deal with the stock exchange or the commodity exchange. The Margin money is kept with the stock exchange. The expiry date of the futures contract is decided by the Exchange. It is usually the last Thursday of every month except when there is a public holiday in which case it is the earliest. All futures contract are sold in multiple of a lot size which is decided by the Stock Market exchange or the commodity exchange. The margin is calculated in real time and constantly updated. For e.g. etc.

Thus if you have reasons to believe that the stock market is going down you can sell a particular stock future or index future and benefit from the price fall. You can sell futures contract even if you don't have shares or the commodity. .` ` ` Futures trading allows you to trade in 'large amounts' with low cash. Trading in stock market Futures is usually less expensive than actually buying stocks. This is possible only if you trade futures and not with physical stocks or commodity.

These limits are also determined by the exchange. no trading is allowed on the other side of that limit for the duration of the session. When these prices change. Once a limit is reached. they must change by at least a certain minimum amount. called the tick. Prices are also subject to a maximum daily change. The tick is set by the exchange. In addition to these limits. This limit serves to prevent one investor from gaining such great influence over the price that he can begin to control it. Both lower and upper limits are in effect.` ` ` Futures prices are presented in the same format as cash market prices. Limits were instituted to guard against particularly drastic fluctuations in the market. . there is also a maximum number of contracts for a given commodity per person.

Options Call Options Put Options .` An option is a contract giving the buyer the right. but not the obligation. to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.

it would allow the holder the right to sell the stock at Rs. For example. so they need to be multiplied times 100. 200. with the XYZ May 30 Call. For example. 30 per share. Were this the XYZ May 30 Put. and all equity option prices are quoted on a per share basis. the strike price of 30 means the stock can be bought for Rs. 30 per share. an XYZ May 30 Call (thus it is an option to buy Company XYZ stock) may have an option premium of Rs.This means that this option costs Rs. It is the price you pay to purchase the option. Why? Because most listed options are for 100 shares of stock. XYZ) can be bought or sold as specified in the option contract.` ` OPTIONS PREMIUMS An option Premium is the price of the option.00.2. STRIKE PRICE The Strike (or Exercise) Price is the price at which the underlying security (in this case. .

Neither Call holders nor Put holders are obligated to buy or sell. Put holders may sell stock at the strike price (to the Put seller). Call holders may buy stock at the strike price (from the Call seller). EXERCISING OPTIONS People who buy options have a Right. For a Put exercise. and that is the right to Exercise. For a Call exercise.` ` EXPIRATION DATE: The Expiration Date is the day on which the option is no longer valid and ceases to exist. they simply have the rights to do so. . and may choose to Exercise or not to Exercise based upon their own logic.

furthermore.There are four types of participants in options markets depending on the position they take: 1. buyers are said to have long positions. . Buyers of calls 2. Sellers of calls 3. Buyers of puts 4. Sellers of puts People who buy options are called holders and those who sell options are called writers. and sellers are said to have short positions.

called the option premium. secures your right to buy that certain stock at a specified price. and you are not obligated to. the price you pay for it. If you decide not to use the option to buy the stock. Call options are like security deposits.` ` ` A Call option is an option to buy a stock at a specific price on or before a certain date. called the strike price. your only cost is the option premium. When you buy a Call option. In this way. .

E ( $2* 00) = $200 The price of $52. John.NUMBER OF SHARES ³A´ WANTS TO BUY FROM JOHN SPOT PRICE STRIKE PRICE OPTIO PRE IU 100 SHARES $50 $52 $2 PER S RE I. the seller of the call option has the obligation to sell his shares even if the price rises above $52 in which case ³ ´ would definitely buy it from him.they are called a Call Option. at which ³ ´ would like to buy the shares is called the strike price of this deal. ³ ´ on the other hand is the buyer of the call option and has no obligation-´ ´ simply has the option to buy the shares. John is selling (or writing) the call option to ³ ´ for a price of $2 per share. Deals of this type have a name. .³ ´ is buying the call option.

` ` ` ` Put options are options to sell a stock at a specific price on or before a certain date. your only cost is the premium. . If something happens which causes the stock price to fall. "damages" your asset. and thus. and there is no "damage. you can "insure" a stock by fixing a selling price." then you do not need to use the insurance. once again. If the price of your stock goes up. In this way. and. With a Put option. Put options are like insurance policies. you can exercise your option and sell it at its "insured" price level.

NUMBER OF SHARES ³JOHN´ WANTS TO SELL TO ³ A´ STRIKE PRICE OPTION PREMIUM 100 SHARES $48 $2 PER SHARE I. It is the risk premium. ³A´ the seller or writer of the Put Option has the obligation to buy the shares at the strike price. In this case. $48 is the strike price of the Put Option. John. ³A´ is writing or selling a Put Option to John.E ( $2*100) = $200 The $2 JOHN is willing to pay ³A´ is all to keep irrespective of whether John exercises the option or not. . In this case John is buying a Put Option from you. the buyer of the Put Option has the option to sell the shares to ³A´. He has no obligation.

The writers or sellers of Call and the Put option are the ones who are taking the risk and hence have to pay 'margin' amount to the stock exchange as a form of guarantee. writing a call. This is just like the margin money you pay while buying or selling a futures contract and as explained in the post on futures trading. They do not pay any margin. In real life you sell (or write) and buy call & put options directly on the stock exchange instead of 'informally dealing' with your friend.` ` ` ` The above examples illustrate the basic ideas underlying. Each Options contract for a particular stock has a specified LOT SIZE. The stock exchange acts as a µguaranteer' to make sure the deal goes through. writing a Put and selling a Put. buying a Call. They simply pay the Options premium. . Options trading is directly or automatically carried through at the stock exchange. Here are some key points to remember about real life options trading. The buyers of Call and Put options on the other hand are not taking any risk. decided by the stock exchange. you do not deal with any person 'personally'.

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