Q.1. Why should I trade in Nifty Futures?
Ans. Futures Trading will be of interest to those who wish:
- Invest- take a view of the market and buy or sell Nifty Futures accordingly
- Hedge- reduce risks associated with market exposure by taking a counter position in the futures market, I.e. buy stock, sell Nifty Futures.
Arbitrage- take advantage of the price difference between the Futures market and the cash market.
Q.2. Do I need to have the securities that comprises Nifty, if I Sell Futures?
Ans. S & P CNX Nifty comprise 50 highly liquid stocks However in order to buy or sell Nifty Futures, you need not own any of those securities.
Q.3. How long should I hold on to a position?
Ans. The period upto which you should hold on to a position in Nifty Futures would depend on your personal preference and perspective. You may take a short term trading view (a Day, an hour or even a few minutes) or a medium term trading view (several days to several weeks) or long term trading approach. Once you have taken an open position. You may: Exit from the position before contract expiration by taking an equal but opposite Future position (a person sells if he had earlier bought and buys if he had earlier sold); Make cash settlement at expiration.
Q.4. But how does one buy all the 50 Nifty scrips at a time, if he wants to do arbitrage?
Ans. NSE is currently providing Basket trading facility where by all the 50 securities could be bought in the same composition, as they constitute in the Nifty for any specified sum.
Q.5. How much money do I pay for a position in Futures?
Ans. Just a small percentage of the contract value called margin.
Q.6. How to calculate contract value in Futures?
Ans. Future price x contract size
Q.7. How is Options different from Futures?
Ans. Futures contracts have symmetric risk profile for both the buyer and seller, where as Options have asymmetric risk profile. In case of Options, unlike Futures, the buyer enjoys the right not the obligation, to buy or sell the underlying.
Q8.. What is 'In-the-Money', 'At-the-Money', and 'Out-of-the-Money' Options?
Ans. A Call Option is said to be In-the-Money when the Strike price is less than the underlying asset price, at-the-money when the strike price is equal to the underlying, out-of-money when strike price is more than the underlying. And opposite is true for the put option.
Q.9. Who decides the premium to be paid on the Options?
Ans. The Exchange does not decide the premium. The demand - supply expectations have a bearing on the premium.
Q.9. What do Options offer?
Ans. Besides offering flexibility to the buyer in form of the right to buy or sell, the major advantage of Options is the versatility. They can be as speculative as one's investment strategy dictates.
Q.10. What are the risks of the Option Buyer?
Ans. The loss of the Option buyer is limited to the Premium that he has paid.
Q.11. What are American and European style Options?
Ans. An American style Option is the one which can be exercised by the buyer on or before Expiration date. The European Call Option is the one, which can be exercised only on the Expiration date.
