Meaning of f-&-o Market:
In India, we call derivatives as f&o market i.e. futures and options market. Derivative is a financial contract which derives its value from another asset, index, or interest rate, called the ‘underlying’. That means the value of a derivative contract is dependant on the underlying asset. If the underlying value of the asset increases, the value of the derivative contract will increases and vise versa.
Type of Derivatives:
The derivative contracts are of several types futures, forwards, swaps, options etc. In our Share Bazaar, two types of derivatives contracts are allowed i.e. futures and options. So f&o is the other name of derivatives.
Specification of f&o contracts:
Derivatives or f&o are periodic contracts and each contract has a fix expiry date. In Share Bazaar, the settlement date of all f&o contracts is on the last Thursday of each month. If there is a holiday on last Thursday the expiry date will be a day earlier i.e. the Wednesday of that month.
There are three monthly contracts available on any underlying at any time. For example, on November 28, 2013 in f&o, NIFTY 28-NOV-13, NIFTY 26-DEC-13, and NIFTY 30-JAN-14 contracts were available. When the November contract expired on November 28, 2013, on next day i.e. on November 29, 2013 the new f&o contract NIFTY 27-FEB-14 was introduced.
f-&-o lot size:
Every f&o contract has a fix lot size. The criteria for lot size is that, minimum f&o lot size should be Rs. 2,00,000 lakh and the upper limit should not increase more than Rs. 4,00,000 lakh. When the value of any f&o lot goes beyond this higher or lower limit, the exchange revises the f&o lot size upward or downward.
For example, XYZ Ltd. has a lot size of 1000 shares and the price is at 390. After one month the stock price of XYZ Ltd. rose to 450. Now the exchange will decrease its f&o lot size from 1000 to 500.
Other criteria for f&o lots are the minimum lot size is of 125 shares in case of stock futures and 25 in case of index futures. The lot size should be in this order: 125, 250, 500, 1000, 2000, 4000, 8000, 10000 and after that 11000, 12000 and so on. Here you can find the current list of f&o contracts traded on NSE.
In F&O market, future contract means a legally binding agreement to buy or sell the underlying security on a future date. All future contracts are cash settled. For example Mr. A buys a future of XYZ Ltd. at Rs. 515. The future contract of XYZ Ltd. has lot size of 500 shares. On the expiry date the price of XYZ Ltd. is at RS. 522. Mr. A has made a profit of Rs. 3,500.
In F&O market, options contract is a type of derivative contract which gives the buyer of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at the end of the contract time. Options are also cash settled.
Call and Put Options:
Options are of two types one is ‘Call option’ and the other is ‘Put option’. Call option means right to buy an underlying asset on a future date on a specific price while put option means right to sell an underlying asset on a future date on a specific price.
In case of put options the fall in the value of an asset is profitable for a buyer of put option whereas in case of call option the rise in the price of an asset is beneficial for buyer.
Specific price discussed above means strike price. Strike price is very important in options. For any contract 1 in the money and 5 out of money strike price options are available at any time. Here you can find full detail of option strike price parameters.
The seller or writer of a call or put option will get the premium and his liability will be unlimited. Whereas the buyer of the call or put option have to pay premium to the seller and his liability will be limited to the premium he had paid.
To understand options let us take an example. Suppose NIFTY is at 6200. Mr. Ram buys NIFTY 6300 strike price call option at a premium of Rs. 50. It means Mr. Ram has a right to buy Nifty above the level of 6300. So if on the expiry date of f&o contract, Nifty is at 6500 Mr. Ram has a profit of Rs. 150. It can be worked out as: current price of Nifty is at 6500 minus strike price 6300 i.e. Rs. 200 and subtracting Rs. 50 paid to buy 6300 call, from it the net profit is Rs. 150.
On the other hand if Nifty is at 6100 i.e. below the strike price the buyer has no obligation. So the net loss is Rs. 50 which Mr. Ram had paid to purchase the Nifty 6300 call option.
Margin in f&o Segment:
In cash segment, when you purchase a stock you have to make a full payment to your broker. You will receive shares in your demat account. When you sell these shares you will get the payment from your broker against the delivery of shares you give to the broker.
But in F&O, when you purchase or sell a future you have to deposit margin with your broker before entering into a contract. The margin depends upon the volatility of the underlying. You can carry it forward till the date of expiry. A daily mark to market difference is debited or credited in your account.
In case of options, the seller of the option has to pay margin while buyer has to pay the premium.