Futures Stock List & Margins Required for Trading

Arbitrage opportunities in options - how options are priced, explained in layman's terms - without resorting to the BS pricing model

Arbitrage opportunities in options - how options are priced, explained in layman's terms - without resorting to the BS pricing model
Alright retards, I've been laid off at work due to beervirus and I've been eyeing and toying with the idea to get back into options trading. I'm writing this post to raise the bar for discussion on this sub, I'm tired of seeing just memes. We'll never match WSB unless there is a healthy mix of dankass memes and geniass discussions.
Now, when it comes to options, I am completely self-taught (completely from first principles, back in 2008, before you autists came up with the idea of watching videos on youtube). Since I am completely self-taught, my perspective will be different from the people who learnt this stuff while studying MBA/finance courses/NSE accredited investing courses. So if what I'm saying is different from what you've heard from the dude who swindled you of 20K for two days of options education or your gay BF's live-in partner, remember when it comes to maths, there are many ways of approaching a problem, ultimately, all are the same - profit means account balance goes up, loss means a loss post on ISB goes up.
Now, I'm assuming that you understand how options work. If not, I suggest heading to Zerodha's Varsity to read up on options. If you're too lazy for this, get your micro-dick outta options, this is a man's game, surprise butt-sex awaits amateurs.
I'm also assuming that you've come to realise that the sustainable way to make money in options is to write options. Unless you've got Trump or Ambani on speed dial to get access to news before it becomes news, YOLOing whatever rent money you have on buying options will blow up your account, eventually.
Writing options also means the possibility of account balance going tits up is a real possibility. You gotta, gotta, gotta measure and manage your risk. You can do this only when you understand options as well as your dick.
Towards this, I intend to put up a bunch of posts (depending on many of you shit heads are still reading at this point) that comment about little things that are more of 'wisdom' than 'education'.
The example below talks about currency derivatives. Why currency? Read below:
  • Lower margin needed. I can short a CE/PE contract with only Rs.2000, unlike the >Rs. 70,000 for index contracts. You get to learn, play and wisen up with an order of magnitude less money than with Nifty or Banknifty contracts.
  • More stable underlying. When you're shorting contracts, the last thing you want is the underlying asset going crazy like a broncho during rodeo.
  • Less autistic crowd in the currency market. While banknifty options attract retards like flies to poop, currency derivatives attract a more educated crowd.
  • Sooner or later, you end up acquiring a more balanced education on economics as a whole, rather than the shit fest that goes on in the local circles.
  • The more contracts you can short, the more strategies you can pursue
  • Decent hedging is possible without throwing away all of your potential profits
  • Lesser stress (anybody else going through premature hairloss or is it just me?) because of points outlined above.
Alright, today, I'm going point how the put-call parity works and by extension, show proof for 'efficient markets' by pointing out how opportunities for arbitrage is pretty much non existent, so you guys can cool it with the whole 'market manipulators' knee jerk reaction.
Alright, to start off, here's the current spot rate of the USD-INR pair:
https://preview.redd.it/qup28ay567j51.jpg?width=452&format=pjpg&auto=webp&s=b79ef1a3480e5cbafa42547143c651397ec57f13
Here's today's USD-INR futures closing rate for Sep expiry:
https://preview.redd.it/krghirc677j51.jpg?width=511&format=pjpg&auto=webp&s=60d52b785baa8a1cd240d0df7949a48c8391ba2d
The difference between spot and futures rates is due to differences in what is construed as 'risk-free' interest rates in the US and in India. Check out this video if you want to understand why the Sep futures is trading at a premium of 27 paisa to the spot rate.
Alright, so the deal is, if you buy 1 futures contract @ 74.49, unless the USDINR exchange rate rises by 27 paisa at the end of Sep (i.e. a spot rate of 74.49) you won't make a profit (ignoring brokerage and stuff). If the exchange rate were to remain the same without any change, you stand to lose (0.27 * 1000, currency derivatives have a lot size of 1000) Rs. 270 per lot. Even worse if the rupee were to appreciate (i.e. exchange spot rate goes down).
Now bear with me if the next few paras are exceedingly boorish, I need to spoon feed people who aren't used to currency derivatives. My strategies are mostly aimed at playing a more risk balanced play, something that yields consistent returns which can be compounded. 10% profit compounded monthly gives 314% growth per year, 3.5% profit compounded weekly gives ~600% growth per year.
Given how the USDINR rate is crashing, one way to profit would be to short a futures contract (duh!).
The orange line indicates the current USDINR exchange rate
As indicated above, if the exchange rate does nothing and remains as is till end of Sep, each lot of USDINR futures shorted yields about Rs. 250 in profit (for something that takes up Rs.3000 in margin, that's a >8% profit in return). Things look even better if the exchange rate were to fall further.
The problem is that things heat up quickly if the exchange rate were to go up. Ideally we would want to hedge against it (which also reduces the margin needed drastically). One way to hedge it would be to buy a at-the-money call (74.25CE @ rate of Rs. 0.555 -> Rs. 555 per lot (i.e 0.555*1000)).
https://preview.redd.it/ze16kyphv7j51.jpg?width=588&format=pjpg&auto=webp&s=a3c2bba9fb314beff309671f03a013e69e08f4e0
Having purchased a call option, the P/L curve now looks like:
The max loss is now limited to Rs. 315
The keen-eyed among you will recognise the above P/L curve as one that matches that of a put option. By shorting a futures contract and buying a call option (both with same expiry), we have created a synthetic put option that would have costed us Rs. 315 (0.315*1000) for one lot.
Now, why go through all of this hassle if we can get the same returns by just buying a put option? Makes sense, as long as we can purchase the 74.25 strike put option at a price lesser than Rs. 0.315 (see above).
Let's see what the put options are going for:
Well, how about that...
The market price of 74.25 puts are exactly the same price as our synthetic put. While the synthetic put came in at Rs. 0.315, the put costs another 0.005 extra to avoid the trouble of shorting a futures contract and buying a call at the same time. This is not by chance, big trading desks have algos (trading bots for the virgins here) that keep an eye out for price disparities. In this case, if someone were to be willing to pay more, the algos would compete amongst themselves to sell the puts at any price above 0.32. And if someone were to be willing to sell a put for less than 0.315, the algos would immediately buy.
The price of the puts move in sync with the prices of the futures and call contracts. Conversely, we can create a synthetic call, and you will notice that the price of the synthetic call works out to be the same as the market price for the 74.25 strike call. We can also create a synthetic futures contract the same way.
The prices of derivatives aren't decided willy-nilly. They are precisely calculated at all times, which forms the basis for the best bid/ask prices. There is no room left for someone to come in and make free money via arbitraging using synthetic contracts.
If you found this insightful, and would like more of this sort of posts, let me know.
Options when used properly, can be used to generate risk adjusted returns that are commensurate with the amount of risk you are taking. If you are YOLO-ing, sure, you can double or triple your money, because you can also lose 100% of your margin. Conversely, you can aim for small, steady returns and compound the crap out of them. Play the long game, don't be penny wise and pound foolish.
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Sebi mulls lowering cost of derivatives trading

Brokers said they could end up paying 30-35 per cent less in initial margins.
The Securities and Exchange Board of India (Sebi) is looking to revamp margins on derivatives trading to reduce costs for market participants, said two people aware of the development. The regulator will consider a single margin system that will help those who trade in futures and options to hedge their share portfolios. Brokers said they could end up paying 30-35 per cent less in initial margins and trading costs could drop 5-10 per cent for others, depending on the nature of their bets.
Sebi and stock exchange officials discussed the matter in the last week of October, the people said. Market participants have been lobbying for such a move on the grounds that margins in India are among the highest in the world. This is said to be one of the factors behind foreign portfolio investors (FPIs) preferring to trade Indian derivatives in offshore locations such as Singapore instead of on-shore.
The regulator didn’t respond to queries.
Derivative market traders currently pay two margins — standard portfolio analysis of risk (SPAN) and exposure. The first is an upfront margin that traders pay at the time of placing trades, a percentage of the value of the trades as calculated by the SPAN software. Exposure is an additional margin that brokers collect from their clients for trading in derivatives at the time of initiating a trade.
The regulator and the exchanges are looking at scrapping the second and retaining only SPAN, the people said. An increase in SPAN margins will partially offset this, benefiting hedged bets.
“If the proposal is implemented, several traders using hedging strategies will end up paying substantially lower margins since SPAN margin is calculated at a portfolio level,” said Chandan Taparia, derivatives analyst, Motilal Oswal Securities. The exposure margin, on the other hand, pertains to that particular trade. “This is a welcome step since such hedging strategies carry limited risk and hence would not be subjected to high margins,” Taparia said.
Brokers said a single margin structure will help individual traders bet on options trading strategies at lower cost.
“On Indian exchanges, retail traders don’t trade option strategies as the margin requirements make them non-viable even though the maximum risk is limited,” said Nithin Kamath, founder and CEO of Zerodha. “With the new proposed margins, we would be enabling retail to trade options through strategies, which have limited risks.”
The regulator had received several representations from industry bodies, including FPIs, to rationalise the margining system for the derivatives market. In the run-up to settlement, margins on some stocks surge as much as 100 per cent of the contract value whereas the global standard is 10-20 per cent.
“The idea of Sebi was to simplify the margining structure and also give some benefit to genuine traders who use derivatives for safety net purposes,” said one of the persons cited above. “However, Sebi is planning to tweak the existing calculation for SPAN margins by increasing the multiplier. This would mean SPAN margins could go higher in lieu of exposure margin.”
A single margin structure will help market participants allocate capital more efficiently.
“Until now, introducing a single margin wasn’t possible since BSE and NSE do it at the exchange level. However, with the introduction of interoperability before the clearing corporations, such a step has been made possible,” said a senior exchange official. “We have also represented to Sebi not to increase the SPAN margins substantially higher since an internal study done by us showed current SPAN margin calculation covers losses that could occur in 99 per cent of scenarios.”
However, those punting on highly volatile stocks are unlikely to get any relief from the scrapping of exposure margins, said the head of derivatives at a domestic brokerage.
“Such contracts are currently subject to more margins, including additional surveillance margins (ASM) and bonus margin for highly leveraged stocks,” the person said. “Our sense is that Sebi will continue to charge the additional margins on such counters.”
About 30-40 stocks are subject to additional margins. In October, Sebi proposed to impose 35 per cent higher margins on the contracts of companies where more than 25 per cent of the promoter shareholding is pledged. This impacted nine counters including Bajaj Consumer, Dish TV, Sadbhav Infrastructure and GMR Infrastructure.
https://m.economictimes.com/markets/stocks/news/sebi-mulls-lowering-cost-of-derivatives-trading/articleshow/72016315.cms
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The 4 Levels of Real Time Data from NSE, BSE & MCX

The 4 Levels of Real Time Data from NSE, BSE & MCX

https://preview.redd.it/e7tty173ldo41.png?width=400&format=png&auto=webp&s=66ad7fbd2532037e2add3672813273ccddb06b6c

Introduction

Real Time Data from NSE, BSE & MCX is distributed to various data vendors as 4 different levels. These levels are mainly based upon the amount of RealTime Market depth (order book) provided by the exchanges. This precision and the knowledge of Market Pricing is far more important for the day Traders than for a long term investor.

The 4 Levels of RealTime Data

There are 4 different Levels of Real Time Data from NSE, BSE and MCX (vary from market to market) :
  • Level 1
  • Level 2 / Level 3
  • Tick By Tick (TBT)

What is Market Depth?

Market depth is the order book or an electronic list of buy and sell orders. This list is organized by price level and updated to reflect real-time market activity. Most of today’s trading platforms offer some type of market depth display. This allows the traders to see the “buy and sell orders”, waiting to be executed. This could include the best bid and ask prices and the size of all the bids and offers. The Market Depth, therefore, mainly segregates, the different levels of the real time data feed from the NSE, BSE & MCX.

Level I Real Time Data from NSE, BSE & MCX

Level 1 data includes only the Real Time Data of the first level in the order book. This includes the Best Bid and Best Ask, plus the total accumulated Volumes Displayed as Bid Size and Ask Size. Depending on the exchange the number of orders might also be made available for each side as order. Currently, the number of orders are not provided by any exchange in India. The Basic market data is known as level 1 market data, and mainly includes the following information:
  • Bid price: The highest price that a trader has offered and is willing to buy the asset at.
  • Best Bid size: The number of shares, lots or contracts that are available at the bid price.
  • Ask price: The lowest price that a trader has offered and is willing to sell the asset at.
  • Best Ask size: The number of shares, lots or contracts that are available at the ask price.
  • Last Traded Price: The price of the most recent trade.
  • Traded Quantity: The number of shares, lots or contracts traded in the most recent trade.
Level 1 market data provides all of the information needed to trade using most trading systems.
If you trade a price action or indicator based strategy, then Level 1 market data should satisfy your informational needs. Level 1 Data is also sufficient for complex indicators, including Market Profile, Market Balance, Delta Divergence etc. If you are not doing Depth of Market Trading, Level 1 data is all you need. Scalpers who trade based on changes in how other traders are bidding and offering, will need Level 2 Market Data.

Level 2 Real Time Data from NSE, BSE & MCX

This type of quotation system is a step up from the Level 1. Data providers offer Level 2 market data at a premium to Level 1. It offers extra information that is neither useful for normal day traders nor for long term investors. Level 2 market data is also known as the ‘order book’. Level 2 market data shows the trader a bigger picture of the market order flow. This because it shows the orders that are currently pending for the market. It is also known as the ‘depth of market’ (DOM) or ‘market depth’. This is because it shows the number of shares or lots that are available at each bid and ask prices. In Level 1, the trader was only able to see the best prices for buying and selling. He could not look any deeper into the details of other less competitive orders on the system. The distribution of noncompetitive orders is important to institutional investors who plan to buy or sell large blocks of shares. Depending on the exchange the level of market depth (of the order book) can be 5, 10 or 20 levels. Normally the level of depth is 5 for Level 2, Real Time Data from NSE, BSE & MCX.

How can Level 2 Market Data be Viewed ?

Market depth data can be viewed on a separate Level 2 window or on a price ladder. Because market depth is in real time, it changes constantly throughout the trading session. A “Price Ladder” or “DOM Display” shows each price level in the middle column. The number of buyers at each price level on the left, and the number of sellers on the right.
https://preview.redd.it/wxsupr4eldo41.jpg?width=287&format=pjpg&auto=webp&s=cadf9b6371b1e0418eba9a0e79ecbc835af9c472
Another way to view market depth is to overlay it on a price chart, as shown in “Charting depth” (below). This is the same data that would appear on a Level 2 window or DOM. The only difference between the two is the visual presentation. In this example, the levels of market depth are displayed over the right-hand side of a price chart, next to the various prices.
Green bars represent the buy orders. The size of each green bar reflects the relative number of shares or lots that buyers would like to purchase. Red bars indicate market participants who want to sell. The size of each red bar reflects the number of shares or lots that traders would like to sell.
https://preview.redd.it/jn1a8anfldo41.jpg?width=287&format=pjpg&auto=webp&s=db655173a57b7099762034d47b9c014f711f210e

Level 3 Real Time Data from NSE

NSE Real-Time Data also provides a 20 level deep order book. Actually, this is a subset of the Level 2 Data, known as Level 3. Here, Level 2 provides market depth data up to 5 best bid and ask prices. Level 3 provides market depth data up to 20 best bid and ask prices. Everything else in Level 3, is the same as Level 2. More details of the various Levels Provided by NSE can be obtained from the NSE Website (Data Vending Info).

Tick By Tick Real Time Data from NSE

The Tick by Tick Feed is provided by the NSE. This feed consists of each and every order or a change in the order. It includes:-
  • A new order accepted & added to the order book
  • Any order canceled
  • Or, any order modified and added to order book. It contains the new and old image (i.e. price and quantity) of the order.
  • Trade – when any order is fully or partially executed.
  • Market Orders added to the book
  • Fully or Partially Traded Market Orders
This feed sends a huge amount of data. For just one symbol, say, the NIFTY future, the number of trades goes to 200 – 300 trades per second.
And this much data is not easy to handle. It also needs better applications to churn out meaningful information from this data. This feed works best on collocated servers and LAN of the exchange. If you required this feed at your location, from a data vendor, you would need a leased line and also a specific software different from Amibroker or NinjaTrader, which is able to crunch the huge data flowing from the exchange with micro second-time stamps. And if you were able to do that, you would also need to be able to trade instantly. Therefore, this feed is not for the retails traders or fund houses. This feed is best suited for High-Frequency Trading (HFT) with servers co-located at the exchange.

Main Difference between Level 1 and Level 2 Market Data?

If you are a new trader, then you only need level I market data. You can always add Level II data, later, if you wish. Level 1 market data provides all of the trading information that is needed to display the Price Charts. This is what you will use to perform Analysis and make trading decisions. For many traders, watching the constant flurry of changing bids and ask Prices on the Level 2 will result in information over-load. This could actually have a detrimental effect as opposed to a positive one.

Can Level 2 Data be useful?

Yes, because it not only shows, where the price is now but where it is likely to be in the near future. Some trading strategies might require Level 2 market data. Typically, this data be used in a scalping strategy, where traders take advantage of short-term patterns are seen in the bidding/offering activities of other traders. Also, for example, if a big fund wished to sell 5 crore shares in a medium-sized company. Using level 1 data, they may see that the highest bid price on the market is Rs.2000 for 50k shares. The fund manager will now know that they can sell their first 50k shares at Rs. 2000. However, the fund managers will have to accept less in order to shift the rest of their holding. Therefore they would then trade at the next best bid price, and so on, receiving marginally less for their shares each time they exhaust an order in the market place. It would, therefore, benefit the fund manager to be able to assess how quickly the competitiveness of the bid prices trail off before they place a large block of shares for sale. This is called – being able to see the ‘depth’ of the market. If the competitive orders are thin on the ground then they may decide to delay their the sale or only sell a small batch. As a result of strong demand; the fund may be able to offload its shares without moving the share price down too much and achieving the best deal for their account holders.

Conclusion

This demonstrates why level 2 data is quite pointless for your average day trader. Trading in such small quantities will rarely exhaust the bid price or offer price which they could see on level 1. Other than very large institutions, the only other viable market participant who could fully utilize such data would be a high-speed, automatic trading the algorithm which pays extremely low commissions. Hope, I have been able to give you an insight on the various Levels of RealTime Market Data & their implications in trading.
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Best Trading Strategies for Nifty Futures

A directory prospect is a derivative, similar to a stock future, whose value is dependent on the value of the underlying, in this case, the index like the S&P CNX Nifty or BSE Sensex, and market profile trading strategies.
By making a trade-in inventory bank nifty future, an investor is buying and selling the basket of stocks comprising the index, in their respective weights.
Stock index futures are traded in terms of order flow trading strategies. Each treaty would be to either purchase or sell a limited value of the index. The amount of the deal would be the lot size multiplied by the index value.
About Nifty futures
Nifty futures are index futures where the order flow underlying is the S&P CNX Nifty index. In India, bank nifty futures trading initiated in 2000 on the National Stock Exchange (NSE).
For auction market theory contracts, the permitted lot size is 50, and in multiples of 50. Like additional destinies contracts, Nifty fortunes treaties also have a three-month trading progression -- the near-month, the next month and the far-month.
After the expiry of the near-month contract, a replacement lease of three-month duration would be introduced on subsequent trading day. Investors can trade Nifty futures by having a margin amount in their account. This margin may be a percentage of the contract value. It's usually about 10-12 per cent.
Why do you have to choose them?
Hedging. In simple terms, hedging may be a strategy that helps limit losses. Exposure to stock is like exposure to an index. this is often because most stocks move in tandem to the market. Exposure to index futures helps hedge this risk — speculative gains. If you're sure about future market movements, you'll make profits through index futures. If you bullish on the market buy index futures. If bearish, you ought to sell index futures.
How do they work?
You enter into a Nifty derivative instrument at a specified index value. On the expiry of the agreement, the investor's profits would be the difference between the extent of the index on expiry and therefore, the level laid out in the derivative instrument at the time of purchase.
Strategies to Follow:
Small stock, extended index futures.
There are times once you sell the capital, but there's an upside within the market, thus leading to potential lost profits. Index futures assist you in mitigating this risk. By buying index futures once you are short on the stock, you'll minimise the number of potential benefits lost: equity portfolio, quick index futures. There are times once you own a portfolio and are uncomfortable about market conditions. You'll hedge this risk by selling index futures. The concept vests on the very fact that each collection has index exposure and risks are accounted for by fluctuations within the index.
Long Stock, Short Index Futures Suppose you're long 500 shares of Reliance Industries at the worth of Rs 1,000 per share; spot Nifty is at 5,000; and Nifty futures is at 5,020. To protect your Rs 5 lakh (Rs 500,000) position from a market downturn, you would like to sell 100 Nifty futures. Suppose on the expiry date; the spot/futures Nifty is at 4,750 (5 per cent fall). On closing, both the positions, you'd earn Rs 2,000. Your job in Reliance Industries would have dropped by Rs 25,000, and therefore the short Nifty would have gained Rs 27,000 [i.e., 100 x (5,020-4,750)] Short Stock, Long Index Futures Suppose you're short 400 shares of Infosys Technologies at the worth of Rs 2,500 per share; spot Nifty is at 5,000; and Nifty futures is at 5,050. To protect your Rs 10 lakh (Rs 1 million) position from a market upside, you would like to shop for 200 Nifty futures. If on expiry, the spot/futures Nifty is at 5,250 (5 per cent rise), on closing both positions, you lose nothing. Your job in Infosys would end in a loss Rs 50,000, and therefore the short Nifty would have gained Rs 50,000 [i.e., 200x(5,250-5000)] Hedging Portfolio Risk Suppose the spot Nifty is at 5,000 and consequently the three-month Nifty futures at 5,015. To guard a portfolio of Rs 5 lakh (Rs 500,000) from a drop by the market, you would like to sell 100 December Nifty futures. Suppose on the expiry date; the spot/futures Nifty is at 4,500 (10 per cent fall). Your hedging strategy would earn you a profit of Rs 51,500[i.e., 100x(5,015-4500)], which compensates you for the Rs 50,000 (10 per cent) fall in your portfolio.
Costs Inherent With Trading Strategies:
There's a reason professional traders once only employed active trading strategies. Not only does having an in-house brokerage reduce the prices related to high-frequency trading, but it also ensures better trade execution. Lower commissions and better performance are two elements that improve the profit potential of the strategies. Significant hardware and software purchases are typically required to implement these strategies successfully. additionally, to real-time market data, these costs make active trading somewhat prohibitive for the individual trader, although not altogether unachievable This is why passive and indexed strategies that take a buy-and-hold stance offer lower fees and trading costs, also as smaller taxable events within the event of selling a profitable position. Still, passive strategies cannot beat the market since they hold a broad market index. Active traders seek 'alpha', in hopes that trading profits will exceed costs and bring a successful long-term strategy.
Thank you!
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Derivative traders in India pay up to 500 times more margin, says study by SEBI sub-committee

India is the only country in the world where initial margin charged in the F&O segment consists of three margins. All other countries charge only SPAN margin
The study also found out that if India followed only the SPAN margin system it would have been good enough to cover the risk for 99.44 percent instances of At-the-Money (ATM) and Out-of-the-Money (OTM) stock option contract. Simply put, there is no need to burden traders with extra margins.
Higher margins result in a lower return on investment (RoI) for a trader. Ironically, an FII who has an option of trading both in India as well as in Singapore Stock Exchange (SGX) has to pay the complete margin in India but only the SPAN margin if he trades the Nifty derivatives in SGX.
With the same amount of money the FII can get better leverage and higher return if he trades abroad. And we are not even talking of the advantage he has while trading in dollars. No wonder volume in SGX has picked over the years.
Not only are margins high in India, but the way they are charged on various option strategies defies logic. Take the case of spread strategies. Spread strategies do not carry any price risk but they take advantage of volatility. Yet NSE charges a full premium for the short options -- almost equivalent to the margin required if the trader was holding short futures position.
Globally, the maximum amount needed to pay as the margin is slightly over the maximum loss that the limited loss strategy would incur. The study has found how Indian traders are at a huge disadvantage in trading various option strategies as compared to traders globally.
Indian traders are restricted by many other margin requirements and ad-hoc increase in margin in order to protect from events like the recent election. The unfortunate part is that these margins are sticky and tend to stay longer, well past the event.
Apart from the margins, various statutory charges are imposed on traders. India has the highest transaction charges in the world and these do not include the taxes one has to pay if they are profitable despite these restrictions.
Despite these handicaps, volumes in Indian stock and index options are among the highest in the world. If Indian exchanges follow global margin methodology Indian markets volumes would be untouchable, not to mention the huge opportunity for collecting taxes.
The report submitted by the sub-committee to the market regulator makes a strong case for aligning Indian margin management practices with global exchanges. The ball is now in SEBI’s court.
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Derivatives future and options

Derivatives future and options
Derivatives future and options
Being a developing nation Indian stock market a being very shallow in late ’90s. In early 2000 India introduces the exchange-traded derivatives on NSE and BSE both. With the emergence of futures trading on NSE India witnessed huge spike in trading volumes and major chunk of new participants entered in the market. During 2000-2008 Bull Run Indian traders make a huge amount of money in futures and options trading.
It’s been 20 years since the derivatives have emerged in India and we have seen a lot of informed traders are trading derivatives market as their full-time career and many also based trading systems have been introduced in recent past. ? So why anyone needs to understand the derivatives and how it will going to help in improvising the trading strategies and profit margin we’ll try to understand this in this article.

Let first try to understand what are derivatives??

Derivatives are the financial instrument which derives its value from the performance of some underlying assets. Any assets whose value are uncertain and cannot be determined can be an underlying asset for derivatives. For example, if we say what will be the value of Nifty in next trading session, intrinsically it is difficult to say where nifty trade will tomorrow at 1 P.M. So two people who hold the opposite view about Nifty can make bet on the moment on nifty and make a contract on this assumption. In derivatives scenario, these types of contracts are known as Futures Contract. Futures market follows the zero-sum game rule, which means one person loss will be the profit of other, financial assets such as share possess some value they create wealth but profit and loss from the derivatives market is being generated from the pocket of traders who are in a trade.

What is the importance of derivatives markets?

  1. Derivative makes Market EfficientDerivative market helps in replicating the underlying asset payoff. The price of underlying and its derivatives will remain in equilibrium which reduces the arbitrage opportunities in the market.
  2. Price Discovery – Derivative helps in determine the correct price for the shares and commodities. Financial markets are affected by all the major news around the world. How the trades interpret this information the prices of stocks keep on changing and helps in discovering the right price.
  3. Counterparty Risk – Derivative market reduces the counterparty risk as exchanges are very strict on margin norms, they take upfront margin from both the parties based on the volatility of stock so that counterparty fulfills their obligations.
There are different types of derivative contract such as forward future options, swaps, floor, and collar, etc. However, the most preferred derivative instruments are futures and options.
Most of the traders all over the world trade in options markets. In India, we have also witnessed that a large number of traders are trading in options markets. Although options trading is the most difficult and complex in all the above derivatives.
Let’s try to understand the options market.
Whenever we talk about directional trading, people are more fascinated towards options trading as it required very less capital and can generate a higher return. But as we discussed option trading and understating is not that much easy to implement. In the option market, there are basically two instruments which trader’s trader – which are known as Call option and Put options. Call options increase in value when the market goes upside and decrease in value market falls. On the other side, put options increase in value when the market falls and decrease in value when the market rise. With these, there are other complications which are attached to options which are known as Option Greeks, such as.
Delta – shows the rate of change of premium with respect to change in option premium. For example, if Nifty rises from 11000 to 11100 how much the value of call and put options increase and decrease in value respectively that is determined by delta. • Theta – show the decrease in value of an option due to passage of time, if the time to expiry is high means the expiry date is for the option value decrease is less but as we approach the expiry value of option started decreasing at an increasing rate.
Vega – shows the change in option premium with respect to change in volatility of the option. Option premium is also affected by an increase or decrease in the volatility of the market, higher the volatility the option premium will tends to be high and vice versa. • Gamma – Show the rate of change of Delta with respect to change in the underlying price. • Rho – Rho signifies the change in option premium with respect to change in interest rate in the economy.
Let’s take an example to understand options working.
Nifty is trading at 11000 and 11100 CE is trading at Rs.55. and the expiry is on 31st Oct. We are expecting that market will reach 11600 by the end of 31st Oct 2019.
Scenario 1. Nifty reaches at 11600 on 31 Oct 2019. Instead of buying the future contract we bought the call option of 11100 at 55.00. So we have paid Rs. 55 from our pocket that’s our outflow [i.e 55*75(75 is the lot size defined by exchange) = Rs.4125. (Total Investment).
First we need to cover out cost to be in profit.
So Strike price + Premium will be our break-even point in this case. i.e 11100 + 55 = 11155. We will start making money when the nifty will start trading above 11155.00 in our case. On 31st Oct Nifty trades above 11155 and closes at 11600 as we expected. P&L = 11600-11155 = 445 (So we earned 445 point on this trade. i.e = 445 *75 = Rs. 33,375.00 So with our expectation be right we make profit of 33,375 with just investing only Rs.4125.
Scenario 2. Nifty goes opposite to our view and closes at 10800. In this case, we didn’t close above 11155 which is our break-even point and we know that if the market goes the price of put options rise and price of call option falls. So, in this case, we’ll lose money. We will lose amount only equivalent to the amount paid which is equal to Rs.4125.00
Scenario 3. Nifty remains at 11000 only. In this case, when the market closes at the same price, the theta will play an important role here, as the expiry comes near our option value which we have bought at Rs.55 will start to decay and it will become zero if the market closes to below 11155. As in our case if stay at 11000 we’ll again loses money as it stays below 11115 and that will again be equal to Rs.4125.
The above calculation shows the simplest working of options trading, there is more and more complex addition to it.
submitted by adomcruze to u/adomcruze [link] [comments]

Foundation knowledge to invest in stock market in India

Hello everyone, I thought many of us are willing to invest in stocks or the stock market in India but are unaware where and how to begin. I am posting about the basic details:

Basically, we have exchanges which provide us a platform to deal in stocks. Definition of exchange: Open, organized marketplace where buyers and sellers negotiate prices.
There are a total of 21 stock exchanges in India, with the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) being the largest. For commodities we have MCX and NCDEX
Well, the first step, talking in India you need a demat account. Now what is that:
An account that holds all the shares that you purchase in electronic or dematerialized form. Basically, a demat account is to your shares what a bank account is to your money. Like the bank account, a demat account holds the certificates of your financial instruments like shares, bonds, government securities, mutual funds and exchange traded funds (ETFs).
Now with that definition, let me elaborate you need a demat account only if you are willing to deal in Shares that too taking the delivery or holding the shares for T+1 day. If you want to invest in other than stock market you need a demat. BUT if you are planning only intraday or day trading; you don’t need a demat account. YOU NEED ONLY TRADING ACCOUNT.
How to open a demat account?
Choose a broker on parameters: brokerage charges, annual charges and leverage provided. Fill up a form; submit documents like PAN CARD, CANCEL CHEQUE, ID PROOF, and INCOME PROOF (BANK STATEMENT OR ITR) AND INVESTMENT OR MARGIN CHEQUE.
WHAT IS MARGIN AND LEVERAGE?
Margin is your investment amount that you are investing and leverage is the limit you get on it. Let’s say you have 10,000/- to invest that is your margin and leverage is limit that broker provides for trading. Like if he gives you 4 times limit that means you can make a trade where you will need a margin of 40,000/-
Why? Because broker make commission on turnover more turnover you make in buy and sell more profit he makes.
You have types of orders at trading platform or the terminal:
CNC (Cash n Carry): For delivery based equity trades. To buy stocks for CNC or for delivery 100% money required. To sell stocks as CNC, stocks need to be available in holdings.
MIS (Margin intraday square off): For intraday trades Trade using MIS for additional leverage/margin. All MIS positions auto-squared off 10 to 15 minutes before close of markets or when losses exceed 50% of margin (Auto-square off rule can vary based on market conditions).
NRML (Normal F&O trades): For intraday/overnight F&O trades without additional leverage. Exchange stipulated margins, positions taken as NRML can be held until expiry, provided required margins maintained.
Types of Orders:
You can trade in equity. In equity you have:
  1. Cash Trading or Cash Market: In this buying or selling of securities is done by providing the capital needed to fund the transaction without relying on the use of margin. Cash trading is achieved using a cash account, which is a type of brokerage account that requires the investor to pay for securities within two days from when the purchase is made.
  2. Derivative: It is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from shares or cash segment only.

submitted by vmodi1612 to india [link] [comments]

Is Ashok Leyland Available at Cheap Price for Long Term Investment ?

Ashok Leyland was recently badly beaten by the market because of recent external and internal factors.
Firstly, the change in the maximum load carrying capacity for heavy vehicles had a negative impact on the future outlook of the company.
It was expected that Ashok Leyland sales of heavy commercial vehicles may decline. As a result, the shares of Ashok Leyland dived around 14%
Read: Ashok Leyland shares slump 14%
Second, and even bigger impact was resignation of Ashok Leyland’s CEO Mr Vinod Dasari.
Read: Ashok Leyland skids on load norms, CEO exit
If you look at past 3 years of financial performance of Ashok Leyland, Company has posted healthy Sales growth of 11.5% CAGR from Rs. 18,937 crores in 2016 to Rs.26,247 crores in 2018.
Also, in the past 3 years, the Net Profit of Ashok Leyland has seen a growth of 58.9% CAGR.
During the same period, Ashok Leyland successfully widened its profit margins from very thin 2% in 2016 to a better 6% in 2018.

Balance Sheet of Ashok Leyland.
However, it was not the strong financial performance that got my attention, it was this…..

Source: BloombergQuint
The screenshot above shows the past 3 years of price trends of the company.
What is interesting to note that recent price correction has wiped out all the gains of the past 3 years, and company is trading the same price available 3 years back despite healthy growth in sales, profits and margins.
If we compare the P/E ratio of Ashok Leyland to its peers, it is the cheapest stock among commercial vehicle segment in terms of P/E

Source: BloombergQuint

Also, Ashok Leyland is trading below its historical average P/E, and almost same valuation as industry average.
What is also interesting is that Ashok Leyland has the highest dividend yield among peers, and also has highest Return on Equity(ROE) than any of its rivals.

https://preview.redd.it/w3wyhemn8zc21.png?width=369&format=png&auto=webp&s=d76c57e360fb6c8906bf1ad4632c13148e62ca11

https://preview.redd.it/vrpx2azo8zc21.png?width=362&format=png&auto=webp&s=d4283643c153fae12722be00a2db9edb1b1e386c
Having stated all the positives about the company, it my responsibility to point out the risks in the company.
The only risk factor that I could find out in Ashok Leyland is that its debt levels are on the higher side.
The Debt to Equity Ratio of Ashok Leyland is at 2.15, which is highest among peers.
However, it should not be a matter of concern if the company is able to maintain high ROE in the future as well.

https://preview.redd.it/3ejkledq8zc21.png?width=363&format=png&auto=webp&s=47c48fb93d13fdfe96500d9c78fe7df72abfc99b
Conclusion:
To sum up, I can say, barring the high debt to equity levels, Ashok Leyland is a lucrative bet for long term investment, if its able to replicate its past performance.
Disclaimer: Ankit Shrivastav is a SEBI registered Research Analyst (Reg. No. INH000006758), I, or my family members may have positions in the stocks discussed above. I encourage investors to do their own research before investing.
I Write at www.infimoney.com
submitted by ankitshrivastav to IndianStockMarket [link] [comments]

MCX, NSE in talks to team up for bigger exchange play

https://economictimes.indiatimes.com/markets/stocks/news/mcx-nse-in-talks-to-team-up-for-bigger-exchange-play/articleshow/64940303.cms
The National Stock Exchange (NSE) and Multi Commodity Exchange of India (MCX) have held exploratory talks to combine their operations and provide a one-stop shop for trading in all kinds of products.
Two people close to the development said that the two exchanges have appointed global investment banks to help in the discussions. NSE has appointed Morgan Stanley while JPMorgan is advising MCX, these people said. The merger, if and when it happens, will help create a bigger exchange with 60 per cent market share spanning everything from equity derivatives to commodity futures.
Rather than setting up new segments by themselves, a merged entity offering all asset classes would be good for participants. For one, brokers will not have to maintain separate demat or trading accounts and margins to trade would be fungible, saving costs to broker and clients and contributing to higher volumes in a universal exchange.
For example, an equity trader having margin in his account could deploy the same to trade in gold or crude oil futures on the commodity segment offered by the merged entity. Since trading in these commodities entails currency fluctuation risk, those could be hedged by selling rupee (against the dollar) on the currency derivatives segment of the said exchange. NSE already offers a liquid currency derivatives platform.
The strengths of both exchanges makes such a merger expedient, according to industry experts. NSE offers the most liquid platform for trading shares in the cash market and derivatives on its futures and options platform. It also offers a liquid currency derivatives trading platform. MCX is the number one commodity bourse in the country, accounting for anywhere between 84 per cent and 90 per cent market share.
submitted by -D1- to IndiaInvestments [link] [comments]

Fundamentals of Trading

Fundamentals of Trading submitted by Enrich_Broking to u/Enrich_Broking [link] [comments]

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