Exchanges such as the NSE and BSE offer futures and options on equities and indexes. A stock futures contract allows you to buy or sell a stock at a fixed price and have it delivered to you at a much later date. A call option on stock allows you to buy the underlier at a pre-determined price at a later date, whereas a put option allows you to sell the underlier. In the F&O segment, delivery is normally not taken or given; just the distinction in the purchase or sell price at square off to when the position was launched is.
Assume that business A, whose stock is traded on the F&O market, will report earnings on Tuesday. A buyer anticipates a rise in the price per share of a lot to Rs 100 from Rs 90. As a result, he invested Rs 90 in a futures contract on A. After A announced his results on Tuesday, the stock increased to Rs 100, and he earned Rs 10 per share. He has only put a fraction of the contract’s value (typically 12 % -15 %) on the table to trade. So, if a lot of A has 100 shares, you put up 12 % of Rs 9,000, or Rs 1,080.
You make Rs 1,000 on a margin of Rs 1,080, a gross return of 93% if the price grows by Rs 10 per share. You lose the same amount if the price drops to Rs 80.
Basics of F&O
Here are the primary features of an F&O:
- Every contract has an end date.
- Each contract in the spot market reflects an underlying stock or index.
- The underlying asset moves in lockstep with the future price.
- Contracts are exchanged in multiples of a predetermined Lot Size.
- Index futures contracts come in monthly series, whereas index options come in weekly and monthly expiry.
- Stock futures and options are only accessible for three months, but index futures and options are available for five years.
Due to the high level of speculation, hedgers and speculators typically trade in the F&O segment. A futures contract’s maximum period is three months.
Who is F&O the Most Suitable for?
- Retail investors
- Institutional Investors – both foreign & domestic
- Hedge Funds
- High Net Individuals (HNIs)
Although futures and options are considered high-risk trading instruments due to the greater minimum capital requirement to trade, they are recognized as go-to products by traders and speculators because of abundant liquidity, particularly in index contracts such as Nifty and Bank Nifty. The F&O segment has a significantly higher trading volume than the cash segment.
Here is the F&O Stock List –
What F&O Stocks are Eligible to be Listed
Here are some of the criteria for inclusion on the F&O stock list.
- On a rolling basis, the stock will be selected from among the top 500 stocks on the base of average daily market capitalization and average daily traded value during the past six months.
- Over the last six months, the stock’s median quarter-sigma order size must be at least Rs 25 lakh.
- The stock’s market-wide position limit shall not go below Rs 500 crore.
- On a rolling basis – the average daily delivery value in the cash market cannot be lower than Rs. 10 crores in the previous 6 months.
What are the Perks of Investing in F&O Stocks?
As margin requirements for key commodities and currency futures have remained relatively stable over the years, they are well-known. When an asset is especially volatile, margin requirements may be temporarily increased, but they are usually unchanged from year to year. This means that a trader understands how much initial margin is required in advance.
Futures have a significant advantage over options in this regard. Options are squandering assets, meaning their value diminishes with time, a phenomenon called time decay. The time to expiry is one of the most critical elements that influence the temporal decay of an option. Time decay is something that an options trader must be aware of because it can significantly reduce the profitability of an option position or turn a winning position into a losing one. Futures, on the other hand, are not affected by time passing.
Another significant advantage of futures versus options is this. Most futures markets are quite deep and liquid, particularly in commodities, currencies, and indexes that are widely traded. This results in small bid-ask spreads and gives traders confidence that they can enter and exit positions as needed. Options – on the other hand, may not always have enough liquidity, especially if they are far from the strike price or have a long expiration date.
Futures pricing is simple and straightforward. The futures price has to be the same as the spot price, also – the cost of carrying the underlying asset until the futures contract matures, according to the cost-of-carry pricing model. Arbitrage activity would arise to correct the imbalance if the spot and futures prices were out of sync.
While the benefits of options over futures are quite more, futures over options provide advantages such as suitability for particular trading investments, fixed upfront trading fees, lack of time decay, liquidity, and a simpler pricing methodology.
Investing in F&Os could be a good choice for the investors who have enough expertise in the stock market – and are ready for the risks. But, it is always a great start to check the ones that are listed on a reliable index.
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