“Badla” trading used to take place before the current marketplace of futures and options had opened up in India. That type of trading used to occur on the streets and there was no regulation governing these activities. Today, the stock exchanges in India such as the NSE or the BSE have comprehensive policies in place to facilitate trading in such derivatives instruments.
Futures and options are two main forms of derivatives in India. A futures is a contract which requires the sale of stock or any commodity at a future delivery date. Such a contract tries to speculate as to what would be the price of a commodity in the marketplace in the future. Future market is a place where buyers and sellers get into such agreements or contracts. Investors who like to speculate on such price movements and who are not really into obtaining the commodities physically, also influence the futures market and form a part of futures trading.
On the other hand, an option is a contract by which a buyer gains the right to buy or sell a certain amount of an underlying asset but comes under no obligation to perform the transaction. The price is called the strike price which comes with an expiry date. You could have a “call” option whereby you have the right to buy an underlying asset or the “put” option which provides the right to sell such an asset. All that a buyer needs to pay is the option premium to the brokerage firm. There are two types of options – European and American in India. The European system provides the exercise date same as the expiry date whereby the American system allows a buyer to exercise his or her rights any time before the expiry date of the contract.
The options seller who sells such contracts is usually the person who is holding onto a futures contract and is under obligation to buy or sell the asset underlying such derivatives instruments. Such sellers who are usually brokerage firms, make profits from such options as limited to the premium paid by the options holder. In case of losses, the brokerage firm has to bear the brunt.
These are some of the main characteristics that guide the futures and options financial instruments and their trading in India. For those who play such markets, advanced knowledge of such transactions is further required to play these markets well.
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