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How to profit from Nifty moves with futures and options

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. We explains how:

1. What are Nifty futures and options? 
Image result for nifty tradingNifty 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 ..

2. How does a Nifty futures and options contract work? 
Suppose trader A feels Nifty will rise from 10700, she can buy one lot (75 shares) of Nifty futures by putting a margin at a fraction of the contract cost . Her counterparty trader B sells her Nifty at that level. If Nifty rises to, say, 10800 A has the right to buy the index at 10700 from the counterparty and sell it to him at 10800, gaining Rs 7500 (100×75). If the Nifty futures fall to 10600, B sells the futures to A for 10700 even though Nifty trades at 10600, which means the buyer faces a Rs 100 a share loss.

As opposed to buying a futures contract, A can buy a 10700 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 10800 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.

4. Where and how can these contracts be traded? 
By opening a trading account with a broker – demat is not necessary since these contracts are cash settled. The contracts can be traded on NSE and BSE. However, most trade them on NSE which has a highly liquid derivatives platform.

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