How To Profit From Nifty Moves With Futures And Options !!!

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Traders with a view on markets and a risk appetite can take exposure to the Nifty by paying just a fraction of the index’s value through Nifty options and futures.

1. What are Nifty futures and options?
Nifty futures are a contract that gives its buyer or seller the right to buy or sell the Nifty 50 index at a preset price for delivery at a future date. Nifty options are of two types —call and put options. A call option on Nifty gives a buyer the right, but not the obligation, to buy the index at a predetermined price during a specified time period. Similarly, a Nifty put gives its buyer the right to sell the index. A seller of the options is obliged to give or take delivery of Nifty from the buyers. In practice index futures are cash settled, like their European counterparts.

2. How does a Nifty futures and options contract work?
Suppose trader A feels Nifty will rise from 18700, He can buy one lot (75 shares) of Nifty futures by putting a margin at a fraction of the contract cost. His counterparty trader B sells her Nifty at that level. If Nifty rises to, say, 18800 A has the right to buy the index at 18700 from the counterparty and sell it to him at 18800, gaining Rs 5000 (100×50). If the Nifty futures fall to 18600, B sells the futures to A for 18700 even though Nifty trades at 18600, which means the buyer faces a Rs 100 a share loss.

As opposed to buying a futures contract, A can buy a 18700 call option on Nifty by paying a premium of Rs 200 (closing price on Friday) per share. If Nifty jumps by 100 points at expiry to 18800 the option value will rise by around Rs 100. The seller of the option has to in this case fork out the money. However, the call buyer could also have an unrealised loss if the Nifty falls by a similar extent. Both futures and options are cash settled except where specified for compulsory delivery by the exchanges.

3. What’s more advantageous – buying a futures or options contract?
Both have their advantages and disadvantages. An option seller has to place a high exposure and Span margin with the exchange that’s way above the option price or premium she receives from a buyer. However, to buy or sell a futures contract, both buyer and seller put up the same margin, which is around 10 per cent of the contract’s overall value. Again, holding an option for long results in loss of value due to time decay, which does not happen in case of futures, which also can be rolled over, unlike the former.

But, gains and losses in futures can be unlimited. In options losses (for the buyer) are limited to the premium paid (sellers of options are exposed to higher loss of risk, though) while profits (buyer) are very high.