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Derivative Trading with indiabulls Dhani Stock Derivative Trading with indiabulls Dhani Stock
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Derivative Trading

F&O Trading lets you trade in futures and options (F&O) segment. F&O contracts are derivative instruments traded on the stock exchange. The instrument has no independent value, with the same being ‘derived’ from the value of the underlying asset. The asset could be securities, commodities or currencies. Its value varies with the value of the underlying asset. The contract or the lot size is fixed. Futures contract: means you agree to buy or sell the underlying security at a 'future' date. If you buy the contract, you promise to pay the price at a specified time. If you sell it, you must transfer it to the buyer at a specified price in the future. Options contract: This gives the buyer the right to buy/sell the underlying asset at a predetermined price, within, or at end of a specified period. He is, however, not obligated to do so. The seller of an option is obligated to settle it when the buyer exercises his right.

Types of Options in Derivatives

Call Option
A call option is an agreement that gives an investor the right, but not the obligation, to buy a stock, bond, commodity or other instrument at a specified price within a specific time period. In simple terms, it means that when you buy a call you purchase the right to buy a certain amount of shares or an index, at a predetermined price, on or before a specific date. The predetermined price is called the strike price or exercise price and the date until which you can exercise the Option is called the expiry date.
Put Option
A put option is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security (stock, bond, commodity or other instrument) at a specified price within a specified time. Put option is a derivative contract between two parties where the buyer of the put option earns a right to exercise his option to the put option seller for a stipulated period of time. Puts are options contracts give you the right to sell the underlying stock or index at a pre-determined price on or before a specified expiry date in the future.

Common Terms in the F&O Market

Short Position

Short Position

A short position is when the price of a future or option goes down. Here short sellers make money till the time it is offset.
Long Position

Long Position

In f&o trading when the buyer buys an asset expecting a rise in its value then it is called a long position till it is offset.
Option Writer

Option Writer

Option Writer is a certified trading member of the exchange who writes option contracts to earn the premium given by the buyer.
Strike Price

Strike Price

In f&o trading, the strike price is the price where the put or call option can be used
At The Money

At The Money

At the money option is when the value of the asset is the same as the strike price. There are no changes in the prices.
Near The Money

Near The Money

Near the money is when the strike price and the value of the asset are close enough.
In the Money

In the Money

In case of a Put Option- ‘In the Money’ is the strike price which is higher than ‘At the Money’ or ‘Near the Money’ price. In case of a Call Option- ‘In the Money’ is the strike price which is lower than ‘At the Money’ or ‘Near the Money’ price.
Out of the Money

Out of the Money

In case of a Put Option- ‘Out of the Money’ is the strike price which is lower than ‘At the Money’ or ‘Near the Money’ price. In case of a Call Option- ‘Out of the Money’ is the strike price which is higher than ‘At the Money’ or ‘Near the Money’ price.
Market Lot

Market Lot

The minimum number of shares bought in f&o trading is called the market lot.
Time Decay

Time Decay

The options contract has a deadline. As the deadline approaches the value starts declining which is known as time decay.

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Indiabulls Securities PIB (Desktop)
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Derivative Trading FAQs
What are derivatives and their types?

Derivatives are financial instruments whose value is derived from other underlying assets. This means that the derivative by itself doesn't hold any value of its own. There are mainly four types of derivative contracts such as futures, forwards, options & swaps. However, the most popular and preferred derivative instrument is Future & Options.

Derivatives provide numerous advantages to the financial markets but some major ones are:

1. Hedging risk exposure.

2. Underlying asset price determination.

3. Market efficiency.

There are mainly four types of derivative contracts such as futures, forwards, options & swaps.

1. Futures
A Future is a contract between parties to buy or sell an asset at a specified date in the future for a pre-settled price. There are two types of futures traded in the stock market- index futures and stock futures.

2. Options
Options provide the buyer of the contract the right, but not the obligation, to purchase or sell the underlying asset at a predetermined price.

3. Forwards
Forward contracts are an agreement between the parties to sell something on a future date. Forwards and Futures are essentially the same however forwards more flexible contracts are because the parties can customize the underlying asset as well as the quantity of the asset and the date of the transaction.

4. Swaps
Swaps are contracts that allow the exchange of cash flows between two parties. The underlying security under swap contracts is the interest rate or currency. The most popular types of swaps are interest rate swaps, commodity swaps, and currency swaps.

Future and Options are traded in NSE

1. Open an online trading account: To start trading in Derivatives, you will require to open a trading account. You can easily open your Trading account with Indiabulls Securities within 15 minutes.

2. Select an Initial Investment amount: You have to make an initial investment to start trading. The initial margin varies for different scrips, in case of Futures or Option writing. To buy Option you need to pay applicable premium.

3. Build on a trading strategy: You need to have a plan to start Derivative trading. You can make a plan based on the understanding of the market, your trading style, risk appetite, capital availability, etc.

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