When was derivative trading started in nse

Obligation: Futures represent a commitment to trade that must be squared off at the specified date. Whereas options give the buyer the right, but not the obligation, to exercise the contract. Date of trade: A futures holder must trade the security at the agreed-upon date. There are some nuances around exercising options for indices versus stocks as well as different rules in different markets. For example, in India, an index option can only be exercised on the expiration date but a stock option can be exercised anytime till the expiration date.

Advance payments: There are no upfront costs when entering into a futures contract. You make the payment only when squaring off the futures contract on the specified date. INR 20, in this example. To execute this contract, you have to keep INR 20, with your broker. The flip side, of course, is that the same logic applies to your losses.

Further, if your losses deepen, you may be required to post additional margin. To buy an option, on the other hand, you will need to pay a premium. The seller of the option earns this premium as should you choose not to exercise the option, you will lose the premium paid. Risk: In case of a price drop, you can opt out of exercising your options. Hence, options theoretically reduce the risk of loss. So, options traders are more likely than not to end up losing their premium.

A call option allows you to buy the underlying asset at an agreed-upon price at a specific date. A put option allows you to sell the asset at a specified price on a specific date. In both cases, the trade is always optional. You can choose not to utilize your call or put option if the prices do not suit you.

Futures and options trading requires an understanding of the nuances of the stock market and a commitment to track the market. There is also a strong element of speculation. Hence, it is most often used by hedgers or speculators. Futures and options trades do not need a demat account but only need a brokerage account. The preferred route is to open an account with a broker who will trade on your behalf. The NSE allows futures and options trade in over securities and nine major indices.

As the derivative that sees more leverage, futures tend to move faster than options. The maximum duration for a futures contract is three months.

In a typical futures and options transaction, the traders will usually pay only the difference between the agreed upon contract price and the market price. Premium Premium With Goldman being the latest, why brokerages are downg Premium Premium Markets make sharp rebound on global support. Things to Know Be Premium Future told to halt asset sale process.

Subscribe to Mint Newsletters. Internet Not Available. These financial instruments help you make profits by betting on the future value of the underlying asset. So, their value is derived from that of the underlying asset. You can read about the advantages of trading in futures and options here.

These changes can help an investor make profits. They can also cause losses. This is where derivatives come handy. It could help you make additional profits by correctly guessing the future price, or it could act as a safety net from losses in the spot market, where the underlying assets are traded. To understand the RBI rules about futures, click here. In the Indian markets, futures and options are standardized contracts, which can be freely traded on exchanges.

These could be employed to meet a variety of needs. You can use derivative instruments to do so. Derivatives market allows you to conduct transactions without actually selling your shares — also called as physical settlement. When you buy low in one market and sell high in the other market, it called arbitrage trading. Simply put, you are taking advantage of differences in prices in the two markets. It also offers products that protect you from a rise in the price of shares that you plan to purchase.

This is called hedging. By far, the most important use of these derivatives is the transfer of market risk from risk-averse investors to those with an appetite for risk.

Risk-averse investors use derivatives to enhance safety, while risk-loving investors like speculators conduct risky, contrarian trades to improve profits. This way, the risk is transferred. There are a wide variety of products available and strategies that can be constructed, which allow you to pass on your risk.

If the benefits have intrigued you enough and you want to start trading right away, here is how to buy and sell future contracts. On the basis of their trading motives, participants in the derivatives markets can be segregated into four categories — hedgers, speculators, margin traders and arbitrageurs.

Let's take a look at why these participants trade in derivatives and how their motives are driven by their risk profiles. Hedgers: Traders, who wish to protect themselves from the risk involved in price movements, participate in the derivatives market. They are called hedgers.

This is because they try to hedge the price of their assets by undertaking an exact opposite trade in the derivatives market. Thus, they pass on this risk to those who are willing to bear it. They are so keen to rid themselves of the uncertainty associated with price movements that they may even be ready to do so at a predetermined cost. For example , let's say that you possess shares of a company — ABC Ltd. Your goal is to sell these shares in six months. However, you worry that the price of these shares could fall considerably by then.

At the same time, you do not want to liquidate your investment today, as the stock has a possibility of appreciation in the near-term. You are very clear about the fact that you would like to receive a minimum of Rs.

At the same time, in case the price rises above Rs. By paying a small price, you can purchase a derivative contract called an 'option' that incorporates all your above requirements.

This way, you reduce your losses, and benefit, whether or not the share price falls. You are, thus, hedging your risks, and transferring them to someone who is willing to take these risks. Speculators: As a hedger, you passed on your risk to someone who will willingly take on risks from you. But why someone do that? There are all kinds of participants in the market. Some might be averse to risk, while some people embrace them. This is because, the basic market idea is that risk and return always go hand in hand.

Higher the risk, greater is the chance of high returns. Then again, while you believe that the market will go up, there will be people who feel that it will fall. These differences in risk profile and market views distinguish hedgers from speculators.

Speculators, unlike hedgers, look for opportunities to take on risk in the hope of making returns. Let's go back to our example, wherein you were keen to sell the shares of company ABC Ltd. In the derivative market, there will be a speculator who expects the market to rise.

Accordingly, he will enter into an agreement with you stating that he will buy shares from you at Rs. In return for giving you relief from this risk, he wants to be paid a small compensation.

This way, he earns the compensation even if the price does not fall and you wish to continue holding your stock. This is only one instance of how a speculator could gain from a derivative product.

For every opportunity that the derivative market offers a risk-averse hedger, it offers a counter opportunity to a trader with a healthy appetite for risk. In the Indian markets, there are two types of speculators — day traders and the position traders. Margin traders: Many speculators trade using of the payment mechanism unique to the derivative markets. This is called margin trading. When you trade in derivative products, you are not required to pay the total value of your position up front.

Instead, you are only required to deposit only a fraction of the total sum called margin. This is why margin trading results in a high leverage factor in derivative trades. With a small deposit, you are able to maintain a large outstanding position.

The leverage factor is fixed; there is a limit to how much you can borrow. The speculator to buy three to five times the quantity that his capital investment would otherwise have allowed him to buy in the cash market. For example, let's say a sum of Rs. Then, you will be able to purchase shares of the same company at the same price with your capital of Rs. If the share price rises by Rs. However, your payoff in the derivatives market would be much higher.

The same rise of Rs. This is how a margin trader, who is basically a speculator, benefits from trading in the derivative markets. However, there are times when the price of a stock in the cash market is lower or higher than it should be, in comparison to its price in the derivatives market.

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