Difference Between Futures and Options

Futures and options represent two of the most common form of "Derivatives". Derivatives are financial instruments that derive their value from an 'underlying'. The underlying can be a stock issued by a company, a currency, Gold etc., The derivative instrument can be traded independently of the underlying asset. 

Derivatives are products that are linked to the value of an underlying share or index. When the NSE launched equity derivatives in June 2000, very few people understood them. In the first month, barely 1,200 contracts worth Rs 35 crore were traded on the bourse.

The value of the derivative instrument changes according to the changes in the value of the underlying. 

Derivatives are of two types -- exchange traded and over the counter. 

Exchange traded derivatives, as the name signifies are traded through organized exchanges around the world. These instruments can be bought and sold through these exchanges, just like the stock market. Some of the common exchange traded derivative instruments are futures and options.

Over the counter (popularly known as OTC) derivatives are not traded through the exchanges. They are not standardized and have varied features. Some of the popular OTC instruments are forwards, swaps, swaptions etc. 

FUTURES

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.

Such an agreement works for those who do not have the money to buy the contract now but can bring it in at a certain date. These contracts are mostly used for arbitrage by traders. It means traders buy a stock at a low price in the cash market and sell it at a higher price in the futures market or vice versa. The idea is to play on the price difference between two markets for the same stock.

In case of futures contracts, the obligation is on both the buyer and the seller to execute the contract at a certain date. Futures contracts are special types of forward contracts. They are standardized exchange-traded contracts like futures of the Nifty index.

A futures contract gives you the right to buy or sell shares at a specific price in the future. The future price is usually higher than the prevailing market price of the security. Futures and options are sold in lots. Highpriced shares are offered in small lots, while low-priced shares are available in big lots.

Futures and options expire on the last Thursday of a month. It’s possible to roll over a future by buying the next month’s contract, but it is not possible to roll over an option.

Stock derivatives are available for up to three months in the future. So, in March, you can buy stock futures and options for March, April and May. But index derivatives can be bought up to three years in advance.

Futures contracts are leveraged instruments. The investor pays just 20-25% of the value of the transaction as margin money. A 1% change in the share’s value means a 4-5% change in the value of the contract. The loss incurred is deducted from the margin and the investor is asked to pay the additional margin. If he can’t pay, the shares are sold.

Contract size: The value of the futures contracts on individual securities may not be less than Rs. 5 lakhs at the time of introduction for the first time at any exchange. The permitted lot size for futures contracts & options contracts shall be the same for a given underlying or such lot size as may be stipulated by the Exchange from time to time.

Price steps: The price step in respect of futures contracts is Re.0.05.

Base Prices: Base price of futures contracts on the first day of trading (i.e. on introduction) would be the theoretical futures price. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts.

Price bands: There are no day minimum/maximum price ranges applicable for futures contracts. 

However, in order to prevent erroneous order entry by trading members, operating ranges are kept at +/-10 %.  In respect of orders which have come under price freeze, members would be required to confirm to the Exchange that there is no inadvertent error in the order entry and that the order is genuine. On such confirmation the Exchange may approve such order.

Quantity freeze: Orders which may come to the exchange as a quantity freeze shall be based on the notional value of the contract of around Rs.5 crores. Quantity freeze is calculated for each underlying on the last trading day of each calendar month and is applicable through the next calendar month.

OPTIONS

An option gives a person the right but not the obligation to buy or sell something. An option is a contract between two parties wherein the buyer receives a privilege for which he pays a fee (premium) and the seller accepts an obligation for which he receives a fee. The premium is the price negotiated and set when the option is bought or sold. A person who buys an option is said to be long in the option. A person who sells (or writes) an option is said to be short in the option.

Like futures contracts, options also give you the right to buy (through a Call option) or sell (through a Put option) a share at a future date. But you are not under any obligation to do so.

Calls: When you buy a Call, you are buying shares of the underlying scrip at a specified price. If the share price goes up, the value of the Call also rises.

Puts: Buying a Put option means you are selling the shares at a specified price. If the price of the underlying security falls, the value of the Put rises.

Index options: If it is an index option, the option can only be exercised on the expiry date. These are European types of options and are denoted as CE (Calls) and PE (Puts).

Stock options: If it is a stock option, it can be exercised at the end of any trading day. These are American types of options and are denoted as CA (Calls) and PA (Puts).

Options are available for stocks and indices at price intervals called the strike price. For instance, if the price of the underlying share is Rs 100, options will be available in intervals of Rs 5. For an index, the strike price may be in intervals of Rs 50. The price paid for an option is called the premium. At the beginning of the contract month, the probability of a share moving in either direction is higher, so the premium is usually high. As the expiry date nears, the premium goes down progressively.

EXERCISING THE OPTION

A buyer can sell the option for a profit (or loss) on any trading day based on his reading of the market. He can also exercise a stock option if the transaction is profitable.

On the exercise and the expiry dates, the value of a Call option is calculated as follows:

Value of Call = Market price of share — Strike price

For a Put option, the calculation is the reverse:

Value of Put = Strike price — Market price of share

HOW FUTURE AND OPTION CONTRACTS DIFFER

If you are a buyer in the futures market, there is no limit on the profit that you make. At the same time, there is no limit on the loss that you make. A futures contract carries unlimited profit and loss potential whereas the buyer of a Call or Put Option's loss is limited, but the profit potential is unlimited.

Purchasing a futures contract requires an up front margin and normally involves a larger outflow of cash than in the case of Options, which require only the payment of premium.

Futures are a favourite with speculators and arbitrageurs whereas Options are widely used by hedgers.

While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore is obliged to sell/buy the asset if the buyer exercises it on him. Presently, at NSE, futures and options are traded on the Index and single stocks.

SBI Hikes Lending Rate For First Time Since April 2016, EMIs to get costlier

Country's largest lender State Bank of India on Thursday raised the marginal cost of funds -based lending rate (MCLR) for one year by 20 basis points to 8.15 per cent from 7.95 per cent. One basis point is one-hundredth of a percentage point.

The new MCLR or the minimum lending rate will be effective from March 1, 2018. The hike in lending interest rates comes a day after SBI hiked deposit rates across maturities.

It raised MCLR rate for loans for other tenors too. The maximum rise has been of 25 bps for loans up to maturity of three years. MCLR includes marginal cost of funds, negative carry due to CRR (cost that banks incur on keeping funds with the RBI as CRR), operating costs and tenure premium (costs arising from loan commitments with a longer tenor). The final lending rate charged to a customer may include spread (a premium) to the MCLR.

This is the first time a bank has raised the benchmark lending rate after the MCLR system came into effect in April 2016. The MCLR system replaced the base rate from April 1, 2016.

 Tenor-wise MCLR effective from 1^st March, 2018 will be as under:

Tenor	Existing MCLR (In %)	Revised MCLR (In %)
Over night	7.70	7.80
One Month	7.80	7.80
Three Month	7.85	7.85
Six Month	7.90	8.00
One Year	7.95	8.15
Two Years	8.05	8.25
Three Years	8.10	8.35

For retail deposits below Rs.1 crore, SBI increased fixed deposit rates by up to 0.50 per cent, while for deposits maturing in one year to less than two years, the pricing has been raised by 0.15 per cent to 6.40 per cent from 6.25 per cent earlier.
Banks are raising interest rates even though the Reserve Bank is leaving its rates unchanged, as risks such as surging bond yields and more provisioning requirements erode their profit.

Another state-run bank PNB also raised its lending rate, effective March 1, 2018. PNB raised its one-year MCLR rate to 8.30 per cent from 8.15 per cent. After this, ICICI Bank also raised its MCLR. The marginal cost of funds based lending rate of ICICI Bank is now 7.95% for the overnight rate against the earlier rate of 7.8%, a hike of 15 basis points.

Many banks have been increasing their deposit and lending rates since the last quarter. While lending rates have been jacked up on an average of 5-10 bps by private sector lenders like HDFC Bank, Axis Bank, Kotak Mahindra Bank and Yes Bank since January, almost all the state-run lenders have been increasing their bulk deposit rates in the range of 15 bps to 125 bps.

According to the report, with a recovery in demand for bank credit, banks with better capitalisation may raise lending rates to improve net interest margins.

      3 Trading Strategies For Increasing          Your Stock Market Profits

Trying to find the right trading strategy that will help increase your profits is incredibly important. Maximizing your stock market profits is done by minimizing the risk whenever and wherever you can. These two elements of trading go hand-in-hand.

This is such an overlooked aspect of trading but did you know, that you can actually increase your profits, simply by losing less on your losing trades? Well of course when I write that, it sounds painfully obvious. But is it really that obvious? I mean, think about it a second...when we get into a trade are we simply considering the hope surround the trade of making big bucks, or are we focusing instead on the risk and how we can keep it to a minimum.

Let’s continue on this thought that we are on here:

• Are you looking stock market profits as an individual trade;

                               OR

• As the collection of well-managed trades, both winning trades and losing trades, over a period of time?

If you are not looking at it from the latter perspective, you are in big trouble!

No worries though, because, this post focuses entirely on your trading strategy and what it takes to increase your profits in the stock market and your collective trades as a whole.

There is a handy Risk-Reward Table that will help you with increasing those profits - so be sure to want to download as well from my free resource library.

So let’s get going on this, shall we?

Increasing Your Stock Market Profits

#1: Don’t Get Out at the Top

We all want to get out at the top - you do, I do, we all do. When we get out of a stock, what do we do? We watch the stock trade for a couple more days, may a couple more months, to make sure we get out at the high tick. 

Oh, and it can sure wreck have on our trading strategy when we think we are making decisions that doesn’t result in us getting every last penny out of our trades.

Do yourself a favor: Stop trying to get out at the top!

I mean seriously, do you know how utterly stupid that is? How many times have you had a stock go up 3% on a breakout, you get all excited, thinking you picked a real winner, you go to the kitchen to grab a snack and find out it is only up 2% now.

You panic, you start to worry, but you say to yourself, "I’ll just wait for it get get back up to 3% and then I’ll sell it."

Well there you go, you are trying to get out at the top, and the market doesn’t really care about rewarding you with that 3% you find yourself entitled to suddenly.

Instead, ask yourself whether the chart is starting to breakdown here or whether it is still valid. If it is valid, fine, raise your stop and stay in the trade. If the chart is breaking down, take the 2% and move on to the next trade - think about what you just did. You made a solid 2% on the trade. Sure, it was up 3% earlier, but that was not in the here or now, and you instead have an opportunity to build on that winning trade with your next trade that could be a winner.

You follow me so far?

Otherwise, before you know it, that chart that is breaking down, is now only holding 1% in gains, and then zilch, and then you are taking a loss. All so you can somehow recapture that 3% you think you should be given by the market.  Don't stubbornly take a loss simply because you want that 3% still. It is a slippery slope for individual trades, when you want to get out at the top. All traders want to get out at the top, but the real profits come when you protect the majority of what you have, get out with a profit and can move on to the next trading opportunity.

Increasing Your Stock Market Profits

#2: Know your winning percentage and average winners and losers

This is key here, y’all. You have to know this stuff. If you don’t, your trading strategy will suffer and along with it, any and all of your profits from trading in the stock market.

First off, calculate the percentage of winning trades that you have had over the last three years. Mine is 52% - anything over 40% is usually a winning frequency. But it doesn’t stop there, because you need to know what the average loss that you take is, and then go about calculating what your average winning trade makes for you.

Once you have done that, then go ahead and calculate what is your average losing trade. For the purposes of this post, let’s keep it simple and say that you win 50% of your trades, you have 4% that you average on your winning trades, and 3% on your losing trades.

Your reward for every 1% risked is is only 1.33-to-1. That is simply not good enough. You need to be at least 2:1, if you are winning 50% of your trades. So you need to start identifying trading opportunities that allow you to place your stop-loss just 2% below your entry point. This will allow you to maximize your profits on your 4% average winners and your 50% winning frequency without putting more pressure on you to press your winners for more profits.

But all things being the same, let’s assume your average losing trade was 5%. That means, the flaw in your trading is that you are losing too much on your losing trades and that alone is what is keeping you from having a profitable trading strategy. It has nothing to do with your winning trades. So adjust the risk and stop-losses accordingly. 

As for myself, I aim to keep my losing trades within a 1-2% average. In doing that, I’m looking to make a 3:1 return on my trades for what I am risking. 

To help you with this important aspect of trading I've put together an extremely helpful spreadsheet that will help you to identify how much you should be risking on each individual trade. 

Increasing Your Stock Market Profits

#3: Identify Resistance Overhead

It drives me nuts how people will buy a stock simply because it is bouncing while totally ignoring huge levels of resistance that is clearly marked overhead.

For example let's say that part of your trading strategy is identifying inverse head and shoulders patterns following large sell-offs. That is a legit trade setup, and one that I personally really like. If you, however, are getting into one of these trades at rs100, but there is multi-month or year long resistance at rs102, then why would you get into it?

There is a very good chance that your stock that you are trading will not allow you to profit a great deal, because once that resistance level is reached, a lot of previous buyers that were trapped in that trade, are going to be looking to get out of the trade that they bought at rs102 (i.e. resistance) and as a result, the stock will have a very difficult time pushing beyond the area being occupied by the bears. Therefore, even though you thought you might have had a 2:1 risk/reward you were really going into a trade that was never going to give you anything more than a 1:1 reward to risk ratio.

So be mindful of the resistance overhead. It comes in all shapes and sizes and it also goes for shorting stocks too. If you are shorting a stock that you have a 2% stop-loss on, but there is a massive multi-year support level just 2% below your entry price, you are not getting into a good trade at all, and no matter what the likelihood you think you have at success, the reward-to-risk ratio does not justify it one bit.

So don’t do it. Support and Resistance are real obstacles when they stand in the way of the direction you want a stock to take. When that happens, just move on to the next trade - there is no shame in it.

Putting Your Trading Strategy All Together

You see, sometimes, the key to improving your returns isn’t in finding a better chart pattern to trade or finding more volatile stocks, or getting rid of large caps and focusing solely on small caps. What it will really come down to, is how you are managing the risk of a trade and what you are doing to minimize the risk impact to your profits.

In the end, risk eats away at your profits. Keeping risk to a minimum will all you to maximize your profits on your winning trades. Those winning trades take a lot of hard work. Why then would you let it get eroded away, by risking equal amounts of risk compared to what you are bringing in on the profit side? 

That's why what I am telling you here makes sense and as a result you should thoroughly vet your trading results.  

So, tell me, what are you doing to minimize your risk on your individual trades?

HDFC Life launches guaranteed rate for deferred annuity pension plan

In a first, private insurer HDFC Life has launched a guaranteed plan for a single premium annuity product, assuring a fixed return of pension for lifetime, the rate of which is decided at the time of the purchase of the plan.

An annuity is a contract aimed at generating steady income during retirement, wherein lump sum payment is made by an individual to obtain certain amounts immediately or at some point in the future.

"Although annuity rates may be acceptable today, if interest rates were to fall, annuity bought at retirement may be lesser than today’s rate…This product, HDFC Life Pension Guaranteed Plan, is addressing the need to have a fixed annuity return…if you give us say 10 lakh, we will give you as high as 12-13 percent which you will get as a guarantee from us from the time you purchase the plan and you will get the income from the time you decide to retire till your lifetime…,” Srinivasan Parathasarathy, Chief Actuary and Appointed Actuary of HDFC Life.

For instance, at age 45, if a customer purchases a plan of Rs 50 lakh with a deferment period of 10 years, he can get an annuity rate of 12 percent with an annuity amount of Rs 6 lakh each year.

In another example, at 45, if you invest Rs 1 lakh, the customer gets a little less than about Rs 12,000 on a yearly basis after 10 years.

Chinmay Bade, VP –Product at HDFC Life said, “We conducted a research of retirement products from those who own annuity and those looking at annuity plans and have come out with this product... The plan allows flexible options for receiving annuity – Monthly, Quarterly, bi-Annually, Annually.”

The product requires a minimum investment of Rs 76,000 with a minimum age of 45 years. In case of death, the lump sum is returned his or her spouse.

Parathasarathy said, “The USP of this product is that if the rates prevailing at that time are less as pegged to the interest rates then, I, as a customer, will still get higher rate, which is guaranteed right away. This is addressing that gap.”

As of now, the business of annuity plans are skewed towards the public sector firms with just a couple of private players. But no plans have fixed rate for a deferred annuity plan.

According to Parathasarathy, when individuals think of long-term financial planning, they often neglect the most crucial aspect, that of retirement planning. It is only when one gets closer to their fifties or crosses their fifties that he/she starts thinking about retirement. With improvement in healthcare facilities, the quality of life has gone up and so has the longevity. In this scenario, it is necessary to ensure that one is able to live a comfortable life after retirement.

He added that annuity products are a factor of the ageing population of the country and people now retiring from the private corporate world have enough corpus for such retirement plans. “Hence, such products will pick up dramatically in the next 4-5 years.”

*First of its kind in the Industry*

*🎯🎯Pension Guaranteed Plan : Deferred Annuity🎯🎯*

🎖Single Premium Plan
🎖Guaranteed Rates for life time
🎖Deferred Period of 0 - 10 Years
🎖 Available in Joint Life Basis
*🎖Guarantee Rates upto 12.45% of the invested amount (minus GST)::: First time in Industry* :: Depends on age & deferred period.
🎯Unique option of top up
🎯Liquidity option
🎯it's a traditional plan
🎯Future Rates available today

*Sample Rates*

*55 Years age* (Single Life)
3 Years Deferred : 8.03%
5 Years Deferred : 9.25%
8 Years Deferred : 11.35%
10 Years Deferred : 12.90%

*All This is guaranteed for life time today*

*60 Years age* (Single Life)
3 Years Deferred : 8.14%
5 Years Deferred : 9.47%
8 Years Deferred : 11.69%
10 Years Deferred : 13.26%

*All This is guaranteed for life time today*

Long Term Capital Gains Tax???

1.       What is the budget proposal on LTCG for equities?

Ans – So far, any LT Capital gains made on equities on Exchanges was exempt. The Govt has now proposed an 10% LTCG tax on gains made above Rs 1 Lakh



2.       When is the tax payable?

Ans – Since it is a Direct Tax proposal it will normally be applicable for the Assessment Year FY19-20 (Financial Year FY18-19). In other words, the LT Capital gains, of over Rs 1 Lakh, made for the year FY18-19 will be liable to tax at 10%.



3.       Does it mean that there is no LTCG for Assessment Year FY18-19 (Financial Year FY17-18)?

Ans – One needs to understand the exact proposal in fine print. However, it appears that any LTCG will not be applicable for FY18-19 on plain read. This question frankly needs greater degree of expert study.



4.       What is the relevance of the cut-off date of 31st Jan 2018?

Ans – The FM has proposed grandfathering of LT Capital gains upto 31st Jan 2018. Any incremental LT Capital gains after that will be counted as LT Capital gains for the new tax.



5.       What happens to my tax liability if I sell stocks starting today held for more than a year?

Ans – As for LT Capital gains made in Financial Year 17-18 (i.e sale upto 31st Mar 2018), it appears there is no tax. However, any sale made after 1st April 2018 will be liable to the new LTCG tax. One needs to segregate this LT capital gain into two parts

a) Part one – is LT Capital gains made upto 31st Jan 2018. This will be highest price of the stock on 31st Jan 2018 minus the cost of acquiring stock;

b) Part two – is LT Capital gains made after 31st Jan 2018. This will be sale price minus highest price of the stock on 31st Jan 2018.

While Part one will be exempt. It is the Part two that will be assessed as LT Capital gains (it can also be a Capital loss) for Tax. Tax on this will be computed at the rate of 10% (+ cess of 3%) only if exceeds Rs 1 Lakh



6.       What should be the strategy now on equity investments?

Ans – Any equity investor wishing to reduce the LT Capital gains tax liability can sell stocks starting today till 31st March 2018 and incur zero tax provided the holding period is more than a year. However, one can continue to buy equity shares without any hesitation. Any future sales after 31st March 2018 has to be judiciously chosen to minimize the tax liability. Assuming equity investments yield a return of 15% every year, an investment of Rs6.66L each year will rise to Rs7.66L in a year and gains booked thereof will be tax free. Even if the gains exceed 15% to say 25%, the LT gains Tax will be Rs6,667/- only