Not everyone in this world can afford all money to buy shares. Future and Options make it possible by allowing traders to trade with less margin or funds. Let’s discuss Future trading in this article.
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WHAT IS FUTURES?
Futures are derivative contracts made between the buyer and seller on a predetermined price of a stock or Index. Also, the commodity market MCX, the currency market supports future trading. Moreover, It is similar to the option trading concept but has some differences. Also, Future trading requires more margin than options. At the same time, the risk is high when compared to all other trading methodologies. Hence, the reward is also very high.
For example, If I predict that HCLTECH‘s share price can reach ₹1000 in September, I will buy HCLTECH SEP FUT. Here the contract ends by September. Therefore, the trader has to buy and sell before the expiry date. Moreover, the expiry date is usually the last Thursday of the contract month. Further, if the price of HCL Tech rises, I will get profits. On the contrary, if the price of HCLTECH falls, I’ll be at loss.
WHY FUTURE TRADING?
Futures allows you to buy stocks at discounted prices. For example, buying 700 qty of HCLTECH at 924.85 requires ₹6,47,395 as a margin in the Demat account. But, futures provide this at just ₹1,58,691 for the contract month. The supply of additional margin is called leverage. Therefore, Future provides an opportunity to trade more quantity with a limited supply of funds.
FUTURE BUYING
Future Buying or Long position is nothing but buying the future first followed by selling. For example, for every rise of HCLTECH, you will be rewarded with profits. On the contrary, for every fall in HCLTECH, you will be at loss. Future buying is as simple as buying and selling in general trades.
FUTURE SELLING
Can you sell a stock or future without buying it? It may sound unreal to you the first time. But, It’s true. In the financial market, one can sell the securities first followed by buying without actually owning them. While selling, the required margin will be blocked in funds and the security will be shown in positions.
Future selling or short selling can be made by selling the future first followed by buying. For example, Consider I am selling HCLTECH futures predicting that the price of HCLTECH falls in the contract month. As expected, If the price of HCLTECH falls I’ll be making profits. On the contrary, If the price of HCLTECH rises I’ll be at loss. Ultimately, It is quite opposite of the Future buying.
M2M MARGIN
M2M or Mark to Market is a procedure for adjusting the profit or losses which happens every day during the future contract. Initially, while initiating a future trade Initial margin will be blocked. This can be treated as a security deposit for the future. Further, If the trader wishes to carry the position to the next day the profit or loss should be adjusted from the M2M margin. For example, if there is a loss today and I wish to carry the position to the next day, I have to add funds to my trading account to offset this loss. Similarly, if I get a profit today it will be added to my margin.
While trading futures, always have the additional margin to offset loss
DIFFERENCE BETWEEN OPTION AND FUTURE
Future and option both go by the single entity because it is classified under a derivative contract. But, it has some differences.
| FUTURES | OPTIONS |
|---|---|
| It’s an obligation to buy or sell an asset at an agreed price at the target date. | The option has the right to buy or sell the asset but not an obligation. |
| Margin/Funds required is high | Margin/Funds required is low |
| Cannot buy at specified price | Options has specified price named strike price |
| Profit and Loss is unlimited | Option buying gives limited loss and unlimited profits whereas option selling can give unlimited loss. |
| Delta has a constant value of 1 | Delta Value is not constant and varies from 0 to 1 |
Click here to read about Technical Analysis for stocks.
WHEN TO TRADE?
Future trade can be executed only during favorable times to avoid loss. For example, If the price of HCLTECH is at an all-time high then it is expected to fall or correct some points. So, we can sell futures at this point. As a result, you will get profits when HCLTECH falls. Likewise, the trader can buy futures at the breakout point or support level of HCLTECH.
Not only the support and resistance, overall factors which affect markets such as the company’s results, global issues, etc. should be counted before making a trade.
Read about Myths on stock market and Equity investment.
HEDGERS VS SPECULATORS
Hedgers are the traders who do hedging to protect their funds from loss. Hedging is a concept of taking an opposite position related to security. For example, consider I am holding HCLTECH in the cash segment (i.e. holding HCLTECH stocks) and it reached the maximum price. Now, I feel that the stock might be correct and fall some points. So, I tend to short/sell futures of HCLTECH which could help me to minimize loss from the cash segment.
Speculators are the traders who buys or sells futures openly without any hedge. Moreover, they are confident that the stock moves in the predetermined direction. For example, If I feel that HCTECH can move up for the next 1 month, I’ll buy the futures of HCLTECH to make profits. However, I don’t have any short positions to safeguard the long position.
TO WRAP THINGS UP!
Hope you have got some basic ideas on trading in futures. As always, Do your research before taking any trade.
What security you’re about to start your first future trading? Equity or Commodity or Currency or Index?
Let me know in the comment section! So Simple!
Good content
Very useful
Hey Nethaji,
Glad that you liked it! Thanks for your support!