The Stock Advise

19/11/2019

19/11/2019

Options are a contract where the price of the options is based on an underlying. Options contracts give the buyer a right to buy the underlying asset without a compulsory obligation of buying the asset. The options segment makes up for a huge part of the Derivatives market around the world. It actually constitutes around 75-80% of the derivatives market. It is a famous and much more tradable segment due to the non-obligation of the trader to not buy the underlying asset.

There are two types of options in the market: Call option and Put option. Traders can buy and sell these options as per their view on the market and their risk appetite.

Call option: The buyer of this option has a bullish view on the market. If a trader is bullish on an index or stock, he/she might buy a call option. Option sellers come into the picture only if they can handle the margin money involved with it. A call option seller usually has an opposite view as compared to the buyer. The view on markets turns bearish if the trader sells a call option.

Put option: The buyer of this option has a bearish view on the market whereas a put option seller has a bullish view on the market.

19/11/2019

Equity or Index futures are a segment which attracts potentially aggressive traders who have the ability to take higher risks than traders in the pure equity cash market. In this segment, the trader needs to have a substantial amount of capital along with healthy risk appetite as this segment involves high risk and volatility. Due to the risk involved in this segment, the trader needs to put in some margin money required by the exchange which would safeguard the latter from a change in volatility. Futures contract come with a pre-defined lot size decided by the exchange. This helps the trader take ‘lots’ of a particular stock without investing in a large amount as required in the equity cash segment.

Certain features of the futures segment are:

Futures contract usually go hand in hand with the movement in the underlying asset.
This segment is standardized, i.e., terms of the contract are not negotiable.
Futures segment is highly regulated by SEBI (Securities and Exchange Board of India).
Futures contract are time-bound. In the Indian market context, the futures contracts are 1 month, 2 months and 3-month contracts.
Futures contract are cash-settled.
Contract value= Lot size * price of futures contract

19/11/2019

Equity cash segment involves investment in deliveries which involves straight-up cash investment and doesn’t involve margin requirement. The investment in this segment is equal to the quantity bought at the current market price. This segment is for traders and investors who don’t want to take the risk of Margin money. Usually, the time horizon is T+2 days (Trade date + two additional days). The cash market is an exchange where the general public, government, firms, etc can buy and/or sell their securities and other financial instruments. Equity cash trading can be done only through a cash account, also called a DEMAT account/Trading account which has to be opened with a broker.

Equity cash trading doesn’t involve the use of the ‘Initial+Span’ margin which makes them safer than margin trading. For example, if a person buys/sells stocks worth Rs. 10000, then the risk involved is capped up to Rs. 10000, i.e., he cannot lose more than the amount invested. In margin trading, the person can lose more than the invested amount. In cash trading, the person is also safe from the interest costs that come with margin trading.