Derivatives are financial instruments which are valued as per the underlying asset on which it is based on. If you are looking at commodities market, then derivative have underlying assets as commodities such as gold, crude oil, food grains and so on. Then again, price indices, market indices can also be the underlying assets of derivatives.

Two main forms of derivatives are futures and options.

Those who are involved with futures and options trading, usually dapple in commodity markets. Futures are tradable contracts which are formed between buyers and sellers who wish to determine the price of a commodity in a future date. The contract binds the seller to sell at the price decided no matter what the future market scenario will be while the buyer agrees to buy a certain amount of commodity from the seller at a pre determined price no matter what the actual market conditions are at the future date so fixed.

Futures trading can be done in three principal ways – by squaring off your contract, by making actual delivery or by making a cash settlement. When you square off a futures contract, you take a position opposite to your initial stance. Such as, if you have purchased a gold futures contract then you square it off by selling a similar contract. In case of actual delivery, it signifies physical delivery of the goods as agreed on the specified date. Cash settlement means the difference that one has to pay when selling a contract, that between the futures price and the spot price of the asset on that day.

Options amongst futures and options trading is a safer financial instrument to play with. It signifies the right to sell or buy an underlying asset but poses no obligation on one to actually buy or sell the asset. There are two types of options – the call option is the right to sell at the strike price at which the contract is bought; the put option is the right to buy the asset at the strike price. Options are again classified into the American style and the European style. The previous style means that such an option can be exercised any time before the expiry date while the European style represent options which can be exercised only after the expiry date.

These are the main defining characteristics of these financial instruments if you want to know what are futures and options.

There are various options strategies which are used by investors. Such strategies can favor different movements in the market, such as a bullish or bearish trend or could be neutral. When one opts for neutral strategies, it could be further classified as bullish or bearish based on the volatility of the price movements. Most investors exercise two types of options – call and put and can maintain long or short positions on such stances.

If you are opting for bullish strategies, these usually indicate that as an investor, you are expecting the price of the underlying asset to move upward. In such cases, one assesses how high the price of the asset will move and accordingly choose the appropriate trading strategy. Most novice investors in case of bullish trends, decide to exercise their call option and use the buying strategy.

If you consider the bearish trends, the strategies vary accordingly. Bearish options indicate when investors feel that the price movement of the underlying asset is going to be negative. In such cases, investors assess as to how low the price will go and then decide on their trading strategy accordingly. Many novice investors decide to exercise their put options and sell in such circumstances. Since stock prices generally do not go down steep, most bearish options investors will set an average price decline estimate and will use bear spreads to minimize cost. Bear call spread, bear put spread are the common strategies employed in such cases.

Neutral strategies on the other hand are used when the price movement is indeterminate. In such cases, the profit to be made is calculated by the strategy undertaken and not by the price movement of the underlying asset. There are several neutral strategies such as Guts, Straddle, Butterfly and Risk Reversal which can be studied in detail by investors willing to play the options market.

Thus, options trading strategies can be several and one needs to understand them in detail before deciding to dabble with futures and options trading in India. Amongst the two, options are less risky investment instruments and if played right, can help one to reap profits in the long run.

The NSE provides the information regarding the various derivatives products traded in India, their systems and procedures, clearing, settlement processes, statistics, risk management and so on.

Each stock exchange has its own characteristics which govern the trading that takes place in its premises. When we talk of futures markets, BSE or NSE function like such markets themselves. For instance, the equity market at NSE functions as a weekly futures market which closes on the Tuesday of every week. If a person decides to go long on Thursday, he or she will not be obligated to perform the transactions right away. Hence, the long position maintained can be reversed on Friday due to which there would be no net obligations remaining on the clearing house. This scenario does not take place in a T+3 makret. Trading at NSE provides a centralized platform due to which the futures market in India remains liquid at best and hence reduces counter-party risks to investors.

When we talk about index derivatives, the NSE-50 index is a set of securities which has been created so that the market impact is minimized when the entire index portfolio is bought or sold together. Index funds, index derivatives are best fincial instruments for trading Nifty. The market risk which is present in the various portfolios in the country can be minimized by referring to Nifty.

NSE or the national stock exchange launched the futures and options contracts on indices like the NSE-50 index. The market impact cost associated with such derivatives was seen with Nifty which can be compared to the highly liquid market indices of the world. The foreign exchange market also has the capability to support a healthy derivatives trading environment. These two comprise the two markets which are compatible for derivatives trading.

Clearing houses are needed in derivatives trading since such activities require highly liquid environments. Accordingly, the clearing house has been set up in NSE known as the NSCC since this is an important factor in large scale derivatives trading.

Derivatives are the sophisticated financial instruments which are priced as per the underlying asset that they represent. Thus, if it is a stock derivative, then the underlying asset is stocks of a company. Similarly, one can have market derivatives, commodity derivatives and so forth.

The two popular forms of derivatives in the market are futures and options. Futures are tradable contracts by which buyer and seller enter into an agreement that they will transact a commodity at a pre fixed price at a future date. On the other hand, options allow buyers to have the right to buy or sell an underlying asset, though not the actual obligation to carry out such transactions.

When you look at the Indian market for derivatives, the National Stock Exchange has a market index which is traded in the form of derivatives. Known as Nifty, it represents a market index which is formed of as many as 50 company stocks highly rated across the country and representing as many as 24 different sectors in the country. Similarly, one may find the Sensex at the BSE or Bombay Stock Exchange for derivatives trading.

Such trading was commenced for the first time in India in 2001. At this time, the futures contracts were formed based on the Nifty index. The Nifty is known as S&P CNX Nifty since it has been created by Standard and Poor which is a well known index service provider in the world. The Nifty is managed by India Index Services and Products Ltd. or IISL which is again formed by NSE and CRISIL.

There are various reasons why many investors like to consider Nifty futures and options. That is because this is a well diversified market index of the country and it represents 60% of the market capitalization that of the National Stock Exchange. The reward to risk ratio is also higher and many mutual fund companies base their fund’s performances as compared to the Nifty since it provides a reliable benchmark.

Thus, Nifty futures and options are reliable derivatives to invest in and take advantage of speculation. Many investors buy futures contracts based on the Nifty and enter into speculation as regarding the price movements of the various stocks that Nifty represents.

Derivatives are financial instruments which, as per their name, derive their value from an underlying asset which can be a commodity, stocks, market index and so forth. The two common forms of derivatives are futures and options. While futures contracts are agreements between buyers and sellers about an asset or a commodity whose price is fixed at a future date, options are contracts formed on underlying assets which provide the buyer the right to buy or sell the asset as and when he or she chooses to but not the actual obligation to carry out the process.

There are various strategies to be employed if you want to be successful at derivatives trading. The stocks traded as futures are usually bought in lots. Then again, future trading occurs as a contract which comes with a stipulated time frame signifying that all transactions have to be done within that time frame. The number of stocks that come with a futures contract can vary and the price of a lot is determined by the number of stocks in it multiplied by the price of the current market prices of the stocks.

A major stock tip is to trade in bulk. This is possible due to the small amount required to either buy futures contracts or options. In case of futures contracts, one needs to pay 20 to 30% of the stock price which is known as margin money. Similarly in case of options, the strike price of such a contract needs to be paid as a premium to hold such instruments.

Another viable stock tip to explore is the short selling tactic. That means that, in derivatives trading, one can sell a futures contract and then buy it back within the expiry date. When a stock is overvalued and is sure to fall in the short term future, this is the method one can employ to gain profits.

Since the brokerage fees are less in derivatives trading than equity trading, it is financially more viable to enter such markets. The brokerage is calculated on the basis of the unit of the lot and not on the unit of stocks.

The other tips urge investors to be aware of the large amounts involved in futures trading and hence, the risks are also large. Since these contracts come in short time frames, they need to be actioned upon faster than equity markets. Hence, you need to be more vigilant, have a greater appetite for risks if you want to play such markets.

Futures and options are part of derivatives trading. These are traded in markets which are much less transparent than other types of stock trading and hence, there is specialized knowledge required as well as considerable risk involved. A derivative is a financial instrument which derives its value from another asset known as underlying. An underlying asset can be another stock, commodity, market index and other things as well. Two main types of derivative instruments are futures and options.

When we talk of options, these involve rights to buy or sell the underlying assets but no necessary obligations to carry them out. Options can be of two types – while a call option is used when one wants to buy an underlying asset, the put option is utilized when someone wants to own the right to sell the underlying asset of a derivative.

When someone wants to buy an options contract, it usually comes with a strike price in India. One can buy or sell the underlying asset at the strike price specified. However, the strike price also comes with a validity date. This specifies the date on which the contract expires. In India an options contract expires on the Thursday of every month.

Futures on the other hand, are contracts that are traded in the market and carry the obligation of actually purchasing the commodity or underlying asset when the contract period expires. Futures are usually involved with commodities like gold, oil, food grains and other types of underlying assets. There is greater risk involved when doing futures trading since the future price movements of underlying assets are involved which brings in greater unpredictability into the trading.

Futures and options are always involved with speculation and hedging activities. While the former is done by investors to gain profits on the price differences that occur over time, the latter is a market strategy deployed to minimize the risks in the price movements of commodities.

These are the various ways futures and options are traded in India and there have been various central level initiatives to provide a more equitable marketplace for such activities.

You can start your futures trading as a business as well since it is a lucrative opportunity and needs very little start up capital. Futures trading is part of the derivatives market whereby all financial instruments which are available for trading are dependent on underlying assets. These can include commodities, stocks, market indices and so forth. Futures are contracts which can be traded in the market and are agreements between sellers and buyers to buy or sell a certain commodity or any other type of underlying asset at a pre determined price at a future date.

Futures trading is unlike stock trading whereby you become owners of actual stocks. Trading in futures indicates not actually owning or buying anything but predicting the direction in which the price of a stock or a commodity is going to move. Thus, sell or buy strategies do not signify actual physical transactions but the strategies to be adopted as per price movements.

Futures trading on the NSE NIFTY Index would involve buying futures contracts if the price would be going up while the sell strategy would be employed if an investor thought that the price of the index was going down. In such cases, no transactions are actually taking place. For futures trading, one does not need to pay anything apart from brokerage costs which are taken as a guarantee that, in case of losses incurred, one will pay up the damages.

Futures trading has several benefits. The main advantage is that, there is high leverage with such trading. If someone can employ the right strategies, one can make a profit from futures trading whether the market is bullish or bearish. One has to deposit a small amount of money while purchasing such contracts, know as margin money which is usually 10% of the entire cost. If cards are played right, one can sell as easily as one can buy and hence, such trading can prove highly profitable in a short while.

Futures trading can only go wrong if one does not employ the right strategies on time and the holding position is not closed before the delivery date. If such a situation occurs, one will be left having to pay for the entire asset as specified in the contract and at the agreed price, whether he or she is interested in the goods or not.

The price of gold is dependent on many factors, and hence is difficult to predict. In India, there has been a tradition to hoard and stock gold physically than going for bank deposits. Many would even trade in gold physically. Now with the advent of gold futures, one can take advantage of the various price movements of gold without having to physically hoard gold themselves.

When it comes to gold futures, these can be highly lucrative investments but one must also be aware of the high risks involved when things go wrong. For instance, if the going price of gold is Rs. 6000 for 10 grams, if you invest 6 lakhs, you can obtain one kilogram of gold. After three months, if the price of gold becomes Rs. 6500 for ten grams, a person might decide to sell the gold and the profit made is Rs. 50,000 for one kilogram. However, for such physical transactions, there are additional costs such as cost of storage, financing, transaction commissions and taxes to be paid.

If on the other hand, you were to invest the same six lakhs in the futures market, with the same price movements, let’s see how it works out.

In the futures market, if you are going to buy gold futures, you can hold on to such contracts for a maximum of four months. For trading in gold futures, on needs to open a trading account with a brokerage house. Margin money needs to be deposited which is specified by the lot size or the minimum amount of the commodity that one has to buy on such a contract. If the minimum lot size on a gold futures is 1 kg, usually, one needs to pay around 5% margin money for such contracts and a brokerage fee of 0.1 to 0.25%. Thus, if gold is being priced at Rs. 6050 for every 10 grams, then the price comes to Rs. 32000. Hence, if you have six lakhs, you can buy around 19 lots of such gold futures contracts. Now, following a bullish view point, if at the end of three months, the spot price of gold goes up to Rs. 6500 per ten grams, then your profit is seventeen times the profit you would have made by hoarding and transacting with actual gold.

However, the risks in case of losses are also magnified and hence, the advice and guidance of market experts are necessary before investing in the highly lucrative avenue of gold futures.

Futures and options are the two common forms of derivatives that most investors take up for trading. These not only diversify their portfolio but also help them hedge off the risks of other finical instruments as well. Futures are contracts which are traded in the market and are agreements between buyers and sellers to agree to buy a certain asset or commodity at a fixed price at a future date. On the other hand, options are contracts that give the buyer the right to buy or sell an underlying asset but not the actual obligation.

If we look at the Indian markets, NIFTY represents a market index which is computed from the performance of high ranking stocks amongst the various stocks listed in the National Stock Exchange or NSE. Nifty market index consists of around 50 companies stocks which come from various sectors, as many as 24 different sectors of the Indian industry. These companies in the Nifty index may vary based on several considerations. BSE has a similar market index that is traded as a derivative known as SENSEX.

Many mutual fund companies base their fund’s performance against the Nifty index as a benchmark. Derivatives trading based on the Nifty index was commenced in 2001 when the Nifty futures contracts were formed. Index futures consist of contracts which consist of the underlying asset as the stock index, in this case Nifty. This allows an investor to look at the market based on the composite performance of the index and is a reliable avenue for investment.

The Nifty futures and options allow investors to speculate and when there is a major surge in the market, investors can purchase futures contract so that they can benefit as the Nifty index continues the upward trend. The main index futures contracts in India are based on the BSE Sensex and the S&P CNX Nifty. Most contracts are valid for three months and every such contract expires on the last Thursday of the month when its delivery date falls.

Thus, Nifty futures and options provide a reliable source of investment for those who are willing to trade in derivatives. The composite market index gives a good indication of the industrial growth and hence, provides less volatile opportunities to speculate with.

Futures are a form of derivatives. A futures contract is a contract that can be traded on futures markets, with the intention of buying or selling underlying instruments at a certain date in the future at a specific price. The date which is fixed is known as the delivery date or the final settlement date. The futures price which is set is also known as the pre-set price. Price of the underlying asset on the due date of delivery is known as the settlement price.

Such a contract comes with the actual obligation to buy or sell, contrary to options, which only provide the right to buy and sell and not the actual obligation. In a futures contract, on the other hand, both parties are required to satisfy the conditions of the contract on the settlement date.

If the underlying asset being traded is a commodity, then the delivery of the physical goods has to take place on the delivery date. In case of stock futures as are done in India, cash settlement occurs whereby the one who makes a loss transfers cash to the one making the profit. In many instances, one can exit or close their position in a futures contract before the delivery date by either buying back a short position or selling a long hand which closes out the futures position and the obligations of the contract are also closed.

Such contracts are essentially forward contracts since the agreement is to buy or sell at a pre determined price for a point in time in future. There are various features of such future contracts. Standardization of a contract as to having the details specified is a characteristic of futures contract. For instance, the underlying asset and the category it falls into, whether commodities such as crude oil, gold or real estate or stocks, market indices and others. The type of settlement to be made is also specified in the contract. From cash to physical goods delivery, the terms are to be specified in the contract. The amount and units of the asset, the currency in which the contract is made, grade of deliverables, delivery month, last trading date are other details that are required to be mentioned in a trading contract.

Futures contracts guidelines are laid down by the Securities & Exchange Board of India (SEBI) and it is vigilant against fraudulent practices being performed in the futures market.