A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time Thus it is forward contract which is a derivative type of instrument in which buyer and the seller are agreed to transact set of financial instrument/ Physical commodities for future at a particular price i.e. if you buy a futures contract, that means you promise to buy something that a seller has not yet produced at a particular price and specific time.If you are entering in future market it is not compulsory that you will have to liable for receiving any delivery (in case of commodities). This is why futures contracts are known as financial instrument.Every futures contract has the following constituents:
* Buyer
* Seller
* Price
* Expiry
Expiry is the time and the day that a particular delivery month of a futures contract stops trading, as well as the final settlement price for that contract.
What Is Nifty Future Or Stock Future ?
Nifty Futures:- Nifty Futures is also a financial instrument in which futures contracts are done on the basis of S&P Nifty index which is the benchmark of NSE. Nifty futures are a instrument type of market in which trading is done on the basis of the underlying index S&P CNX NIFTY.Nifty is index of 50 blue chip companies consisting in NSE (National Stock Exchange) and represent the performance of these companies. Nifty covers more than 70% of traded values of stocks in NSE and also it covers around 60% of total market capitalization.
Nifty futures trading cycle :- S&P CNX Nifty futures contracts have a maximum of 3-month trading cycle - the near month (1st ), the next month (2nd ) and the far month (3rd ). A new contract is introduced on the trading day following the expiry of the near month contract. The new contract will be introduced for three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market i.e., one near month, one mid month and one far month duration respectively.
Expiry day :- S&P CNX Nifty futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.
What Is Options Contract ?
An option is the right, not the obligation, to buy or sell a futures contract at a designated strike price. For trading purposes, you buy options to bet on the price of a futures contract to go higher or lower. There are two main types of options - calls and puts.
Calls You would buy a call option if you believe the underlying futures price (suppose Nifty) will move higher. For example, if you expect Nifty futures to move higher, you will want to buy a corn call option.
Puts You would buy a put option if you believe the underlying futures price will move lower. For example, if you expect Jindal Steel futures to move lower, you will want to buy a Jindal Steel put option.
Premium You are obviously going to have to pay some kind of price when you buy an option. The term used for the price of an option is premium. You can think of the pricing of options as a bet. The bigger the long shot, the less expensive they will be. Oppositely, the more sure the bet is, the more expensive it will be.
Contract Months (Time) Options have an expiration date, which means they only last for a certain period of time. When you buy an option, you cannot hold it forever. For example, a December Reliance call expires in last Thursday of November (In India). You will need to close the position before expiration. Generally, the more time you have on an option, the more expensive it will be.
Strike Price This is the price at which you could buy or sell the underlying futures contract. For example, a April 5700 Nifty call allows you to buy a April futures contract at 5700 anytime before the option expires. Most traders do not convert options, they just close the option position and take the profits.
Example of Buying an Option:
Lets say you expect the price of gold futures to move higher over the next 3-6 months. It is currently April, so you would probably buy an November gold call to give yourself enough time. Gold is currently trading at 2100 per gram. You expect the price to climb to 22000 within 6 months.
You purchase: 1 November 22000 gold call at 100
1 = number of options you are buying
November = Month of option contract
22000 = strike price
Gold = underlying futures contract
Call = type of option (bet on price moving higher)
100 = premium (10000 is the price to buy - 100 ounces of gold x 100 = $10000)
