Derivative Market In Indian Stock Market

A derivative is a contract between two parties that derives its value or price from an underlying asset. Common types of derivatives are futures, options, forwards, and swaps, whose value is derived from an underlying asset.

Example:

1. The price of petrol is derived from the price of crude oil; petrol is a derivative, and crude oil is an underlying asset.

2. Since curd comes from milk, assume curd is a derivative and milk is an underlying asset, just as in our financial market, the value of reliance futures and options is derived from its underlying asset, which is Reliance's share.

Types of derivatives contracts:

1. Future contract: a contract that obliges the buyer to purchase some underlying asset at a predetermined future price and date.

Three important things to know about future contracts

• a. Contract expiry
• b. Contract Lot Size
• c. Span Margin

2. Option contract: a Contract that gives the buyer the right but not the obligation to buy or sell the underlying asset.

Buying premium in the margin of entering into the contract, ex. Nifty CMP 17000 strike 17200, premium 100, lot size 50.

Margin = premium * lot size = 5000

3. Forward contract: A contract between two parties to buy or sell an asset at a specified price on a future date.

4. Swap contract: A contract between two parties for a financial exchange so that they can exchange cash flows or liabilities.

There are more than thousands of stocks in the NSE, but only 191 stocks are traded in futures and options, so you don't have futures and options trading for all the stocks that are in the market.

Difference between futures and options:

• In future trading, you will pay span margin. For example, if the Reliance future price is 2350* lot size of 250. = 5,87,500, you will pay span margin of 1,07,000, which is approximately 18% of the overall value.
• Option trading here means you're paying the premium value, here is an example:

Reliance 2300 Strike Call option is trading at 100, then 100*lot size, which is 250, so the value will be 25000.

Above, I have given the example of the reliance share price and mentioned the lot size and span margin; now, in all other stocks, the lot size and span margin will be different.

Consider this point an important one if you're a beginner in futures and option trading; if you are, trade particularly in the index rather than stocks because the index will have good liquidity, which will be safer for beginners.

If you want to learn futures and options trading practically, we recommend our derivative course, which will help you get started on your trading journey..

Regards

Class Course

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