Derivative
A derivative is a contract between two parties which derives its value from an underlying asset which can be an Index, Equity, Commodities, etc. This investment option provides a good leverage opportunity and is a great tool for speculation. It can be traded in index futures and index options, stock futures and stock options.
Futures:
A future is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. Through karvyonline.com, you can now trade in index and stock futures on the NSE. In futures trading, you take buy/sell positions in index or stock(s) contracts having a longer contract period of up to 3 months. Trading in futures is simple! If, during the course of the contract life, the price moves in your favour (i.e. rises in case you have a buy position or falls in case you have a sell position), you make a profit.
Options:
An option is a contract, which gives the buyer the right to buy or sell shares at a specific price, on or before a specific date. For this, the buyer has to pay to the seller some money, which is called premium. There is no obligation on the buyer to complete the transaction if the price is not favourable to him. To take the buy/sell position on index/stock options, you have to place certain percentage of order value as margin. With options trading, you can leverage on your trading limit by taking buy/sell positions much more than what you could have taken in cash segment.
- Call Option has the Right but not the Obligation to Purchase the Underlying Asset at the specified strike price by paying a premium, whereas the Seller of the Call has the obligation of selling the Underlying Asset at the specified Strike price.
- Put Option has the Right but not the Obligation to Sell the Underlying Asset at the specified strike price by paying a premium, whereas the Seller of the Put has the obligation of buying the Underlying Asset at the specified Strike price.
Advantages:
Risk Management:
In derivatives some financial risk can be transferred to other parties who are more willing to take or manage the risk. Thus it can be useful tool for risk management. Below are two risk management techniques.
Hedging:
It is taking equal or opposite positions in two different markets such as buying in the cash segment and agreeing to sell in the derivative market or vice versa.
Arbitrage:
It is a profit making market activity of buying and selling of same security on different exchanges. Arbitrage as a practice is followed to take advantage of price disparity.
Enhances Trading Limits:
An option trading gives high exposure to a stock or security by paying a small margin.
Potential Return:
There is a possibility to make money in different market conditions.
Time Leverage:
It gives a time leverage of up to 3 months as against 1-3 days offered in other margin products. Please click here for overview on derivatives
