FOME

CONCEPTS Part 1
FUTURES BECOME A PRO
MONEY WILL FLOW

FOCUS =
SUCCESS!
FOME Concepts Part 1 - FUTURES

INDEX
Derivatives Introduction..…………………………………………………….......................3
Types of Derivatives…………………………..……………………………………………………..4
Why Derivatives?……………………………………………………………………...................5
Equity v/s Derivative Market….………………………………………….........................7
Futures………………………………..…………………….................................................9
Futures Terminologies……………………………………………………….......................11

2
What are Derivatives?

➢ It is a financial product/contract which does not have its own value.

➢ It derives its value from an underlying asset. These underlying asset could
be stocks, indices, commodities, currencies, exchange rates, or the rate of
interest.

➢ E.g. INFOSYS ticker traded in Futures market is a “DERIVATIVE” of INFY

stock from the Equity (Spot) market.

➢ These financial instruments help you make profits by betting on the

future value (Both Up and Down side) of the underlying asset.

➢ In the Indian markets, FUTURES and OPTIONS are standardized contracts,

which can be freely traded on exchanges.

3
 Types of Derivatives

DERIVATIVES

FUTURES OPTIONS

STOCKS INDEX STOCKS INDEX

[L&T, HDFC] [NIFTY, BANKNIFTY] [L&T, HDFC] [NIFTY, BANKNIFTY]

COMMODITIES CURRENCIES COMMODITIES CURRENCIES

[CRUDE, NATGAS] [USD/INR,GBP/INR, [only in Crude Oil [USDINR]

EUR/INR, JPY/INR] and Gold for now]

4
Why Derivatives?

➢ Less Money required to invest.

➢ Example:
• 500 RIL shares @1780 in cash market = Rs. 8.9 L
• 1 Lot (500 shares) of RIL in futures (@20% margin) = Rs. 1.78 L
• 1 Lot of RIL – 1800 Call Option @ Rs. 25 premium = Rs. 12,500

➢ Hedging against Investments

➢ Speculating Market or Stock Moves

➢ Earning Rent on Stock Investments

➢ Arbitrage Trading

5
Fact about Derivatives Market

BITTER FACT:
95 % LOSE MONEY
&
5 % MAKE MONEY
INTERESTING FACT:
5 % MAKE MONEY THAT 95% HAVE LOST

6
Equity v/s Derivatives Market
PARAMETERS EQUITY MARKET DERIVATIVES MARKET
In Derivatives market, contracts are
When you buy a share in Equity
traded of underlying assets, hence
OWNERSHIP market, you actually own those
you don’t actually own the units of
many units of the company.
company.
Margin Cost for Futures (15-20%),
INVESTMENT Total Cost of Shares
Premium & Margin Cost for Options
No restriction, can trade/invest As per standard Lot size. E.g. Reliance
SHARE QUANTITY
even single share – 1 Lot (1000 shares)
One/Two/Three Months contracts
DURATION OF
No Specified Duration expire at last Thursday of each
HOLDING
Month
SHORT SELLING Only Intra-day Intra-day as well as Positional
ROI (Eg.: 10%
Futures: 50-60%,
MOVE IN STOCK 10%
Options: 100-500% approx.
PRICE)
PRICE Futures Price (Premium or Discount),
Spot Price
DENOMINATION Options Price
7
FUTURES

8
What are Futures?

➢ It is an agreement or a contract between two parties to buy or sell

specified quantity of the underlying asset at a price agreed upon by
the Buyer and Seller on or before a specified time.

➢ Both Buyer and Seller of the contract are “Obligated” to Buy or Sell
the Underlying Asset.

➢ Risk and Reward are “UNLIMITED” for both Buyer and Seller.

➢ Limit your Risk by following STOP LOSS!

9
Futures Contracts

10
Futures Terminologies
➢ Long: It is another name for buying but into Future market.

➢ Short: It is another name for selling in Future market. It is also known as

Short selling. It helps traders to make profit from declining stock and index
prices. Simply put, you first sell at a high and then buy at a low.

➢ Spot Price: Price of the underlying asset in the spot market. In Derivative
market, all the open positions are squared off at spot price on F&O Expiry
day.

➢ Future Price: Price of future contract of underlying asset in Derivative

market.
• Premium: When future price is more than spot value, it is said that
future is at premium, indicating high demand and bullishness.
• Discount: When future price is less than spot value, it is said that future
is at discount, indicating high supply and bearishness.

11
Futures Terminologies
➢ Contract/Lot Size: In the Derivatives market, contracts cannot be traded for a
single share. Instead, every stock futures contract consists of a fixed lot of the
underlying share. E.g. Reliance F&O contract has a lot of 500 RIL shares.

➢ Contract Month:
• Current or Near Month – Mostly Liquid
• Next or Mid Month (2nd Month) – Mostly Illiquid
• Far Month (3rd Month) – Almost zero liquidity in Indian Markets

➢ Contract Expiry:
• Last Thursday of every month for Monthly Expiry. E.g. NIFTY

➢ Roll Over: It refers to carrying forward of futures positions from one series
which is nearing expiry date, to the next one.

➢ Cost of Carry: Premium over the spot price in futures.

12
Futures Terminologies
➢ Open Interest (OI): Total outstanding positions in the futures market at a
given point of time.

➢ Volume: Number of contracts traded during a period.

➢ Initial Margin: Deposit required to pay to the broker to take a position in

F&O market.

➢ Maintenance Margin: To ensure that the balance in the margin account

never becomes negative. If the balance in the margin account falls below
the maintenance margin, the investor receives a margin call and is
expected to top up the margin account to the initial margin level before
trading commences on the next day.

➢ MTM [Mark-To-Market]: At the end of each trading day, the margin

account is adjusted to reflect the investors gain or loss depending upon the
futures closing price.

13
Mark To Market

14
Ready for Question & Answers…!!??

15
 Our Motto
at

ALL-FOR-ONE
ONE-FOR-ALL
DEVELOPING CHARACTER THAT DESERVES SUCCESS!

www.avadhutsathe.com