Every Traders Dilemma- trade futures or options
Big choice selection for
every trader, What’s better to trade — Nifty futures or options?
It
totally depends on a trader’s risk appetite and what kind of trader wants or
whether he is speculator or hedger, and also on the volatility of the market.
The person with the lower risk capacity should go for call or put option as it
is cheaper and it do not depend on daily market.
1. How does it work?
Let’s say a trading firm adviser street has a view on market that Nifty will rise above 11,000 by January 31,and he is ready to take risk . He could simply buy futures at the Friday closing of 10,937 or buy an 11,000 call option for Rs 79 a share (75 shares make one Nifty contract). The trader could also write a Nifty put option as he is bullish . He will lose only if the Nifty falls from the current level of 10,937 for futures and stays below 11,000 for options by expiry. The gross profit on futures is Rs 12,225 at contract level — difference between 11,100 and 10,937 multiplied by 75. The 11,000 call expires Rs 100 ‘in the money’. On that you make gross profit of Rs 1,575 as you had invested Rs 5,925 (79×75) in the options contract. (don’t go on figures it’s for example but see the concept behind it).
Let’s say a trading firm adviser street has a view on market that Nifty will rise above 11,000 by January 31,and he is ready to take risk . He could simply buy futures at the Friday closing of 10,937 or buy an 11,000 call option for Rs 79 a share (75 shares make one Nifty contract). The trader could also write a Nifty put option as he is bullish . He will lose only if the Nifty falls from the current level of 10,937 for futures and stays below 11,000 for options by expiry. The gross profit on futures is Rs 12,225 at contract level — difference between 11,100 and 10,937 multiplied by 75. The 11,000 call expires Rs 100 ‘in the money’. On that you make gross profit of Rs 1,575 as you had invested Rs 5,925 (79×75) in the options contract. (don’t go on figures it’s for example but see the concept behind it).
2. So, What does it
means is the profit bigger from trading futures?
From some aspect we can
say yes, but on a relative basis, return on investment is very much greater in
options. To buy the 11,000 option the trader just paid the mere amount of Rs 79
a share or Rs 5,925 a contract. The
gain was Rs 21 a share or Rs 1,575. The return was a large 27 per cent. On
futures he puts up a 15 per cent margin just to buy one single contract
(10,937×75) or Rs 1.23 lakh. The return of Rs 12,225 is just 9.9 per cent,and
the funds are blocked and traders looses on, and if you have right advisor like adviser street than you can get good returns in options.
3. So is it means that
options are better choice than futures?
The thing is that trading an out-of-the-money (OTM) option is cheaper than a futures contract as one is not subjected to mark-to market losses as in the case of a futures contract or an options seller. The maximum loss for an option buyer is just his premium or the price he pays to buy the option from a seller. It’s not like that in futures there is no profit, in future there can be huge profits but so as the losses will be. On the contrary, time reduces the value of an option, but this doesn’t apply for a futures contract. Also the profit earned in futures is much higher than the options. Option buyers make smaller profits as compared to futures traders but the risk is lesser for option buyers as compared future buyers. So it’s like lower the risk lower the gain, higher the risk higher the gain, it totally depends on the trader that how much he can take risk, advisors like adviser street can help in managing the risks and in making profit.
4.
How
to avoid losses?
https://economictimes.indiatimes.com/markets/stocks/news/hedging-and-betting-with-index-futures-options/articleshow/67718986.cms
nice article, thanks. check out my blog on.a3trading
ReplyDelete