5 doubts about the Futures Market
@sanjosedesi and SavantGarde,
Firstly, thanks to both of you so very much for the replies. Cleared many of my doubts.
Sorry, SavantGarde, for making you type.
So in short, if I don't have enough ledger balance to cover the losses at the end of a trading day, it will be squared off... but never otherwise.
To recap, I got the answer to Doubt No. 1. They can even sell your holdings to get back the money.
Answer to Doubt No. 2 is that indeed someone HAS to buy a Futures contract of the company for me to sell it.
To Doubt No. 3 is that yes I can sell Futures contract at any second after it's purchase till expiry date.
To No. 4, Yes I can "roll over".
These might be somewhat stupid questions,
But in general, the stocks are just as Liquid if not more Liquid as it is in the Equity market(different for each stock, obviously)? I won't have to wait to sell a contract?
And the part about Income Tax, how do I know the difference between my Futures earnings and Equity earnings to know which will incur higher tax or lower tax?
When you said:
I didn't fully understand. The month I buy the contract is what you've called "current month", right? How is that month more active than subsequent months? Won't there be people buying new Futures contracts the next months as well? Or are there some fixed 3 months when it's best to buy Futures contracts?
Firstly, thanks to both of you so very much for the replies. Cleared many of my doubts.
Sorry, SavantGarde, for making you type. So in short, if I don't have enough ledger balance to cover the losses at the end of a trading day, it will be squared off... but never otherwise.
To recap, I got the answer to Doubt No. 1. They can even sell your holdings to get back the money.
Answer to Doubt No. 2 is that indeed someone HAS to buy a Futures contract of the company for me to sell it.
To Doubt No. 3 is that yes I can sell Futures contract at any second after it's purchase till expiry date.
To No. 4, Yes I can "roll over".
These might be somewhat stupid questions,
But in general, the stocks are just as Liquid if not more Liquid as it is in the Equity market(different for each stock, obviously)? I won't have to wait to sell a contract?
And the part about Income Tax, how do I know the difference between my Futures earnings and Equity earnings to know which will incur higher tax or lower tax?
When you said:
I didn't fully understand. The month I buy the contract is what you've called "current month", right? How is that month more active than subsequent months? Won't there be people buying new Futures contracts the next months as well? Or are there some fixed 3 months when it's best to buy Futures contracts?
(joke alert) Actually no. You can even sell it the second before the purchase !! It does not require Rajnikanth.
And this is serious ... you can either sell or buy futures to open your trade. If you sell (same as shorting), all the models get reversed. If the market moves up, you lose money. If the market moves down, you make money. You still pay a margin. You get mark to market every day depending on the direction of the market. And so on ..
Selling is more risky than buying ... buying your maximum drawdown is the value of the contract. If the stock tanks 100%, you lose everything. However, if the stock goes up 1000%, imagine what you will be required to pay out. Of course, the 1000% run up will not happen in a day, but you will be bleeding every day to hold your positions.
Stocks have contracts only for 3 months ... current, next and "Far" month (I thought indices had more contracts, but NSE is not showing them). People usually trade the current month and that's why the volumes are so high there. See for yourself ... enter any valid scrip (Nifty, Reliance, SBIN) in the following web page.
http://nseindia.com/content/fo/foquote.htm
As of now, Nifty shows 360K contracts traded for current month (these might be trades for Friday), 80K for next month, and barely 3 K for the far month. SBI is 59K, 11K and 81 !! You will not find the far month contracts liquid, especially when you move from indices to individual stocks. Some low volume stocks may have single or double digit trades in their far months.
And this is serious ... you can either sell or buy futures to open your trade. If you sell (same as shorting), all the models get reversed. If the market moves up, you lose money. If the market moves down, you make money. You still pay a margin. You get mark to market every day depending on the direction of the market. And so on ..
Selling is more risky than buying ... buying your maximum drawdown is the value of the contract. If the stock tanks 100%, you lose everything. However, if the stock goes up 1000%, imagine what you will be required to pay out. Of course, the 1000% run up will not happen in a day, but you will be bleeding every day to hold your positions.
Stocks have contracts only for 3 months ... current, next and "Far" month (I thought indices had more contracts, but NSE is not showing them). People usually trade the current month and that's why the volumes are so high there. See for yourself ... enter any valid scrip (Nifty, Reliance, SBIN) in the following web page.
http://nseindia.com/content/fo/foquote.htm
As of now, Nifty shows 360K contracts traded for current month (these might be trades for Friday), 80K for next month, and barely 3 K for the far month. SBI is 59K, 11K and 81 !! You will not find the far month contracts liquid, especially when you move from indices to individual stocks. Some low volume stocks may have single or double digit trades in their far months.
As of now,
- current month is February
- Next month is March.
- Far month is April.
The day after expiry
- Curent month will be March
- Next month will be April
- Far month will be May
We have only 3 days left to expiry so March volumes will start going up ... people will not buy or sell contracts for current month unless they are taking a real short term trade.
Expiry is usually the last Thursday of the month, but do check on NSE site. Usually the contract name tells you when it expires.
- current month is February
- Next month is March.
- Far month is April.
The day after expiry
- Curent month will be March
- Next month will be April
- Far month will be May
We have only 3 days left to expiry so March volumes will start going up ... people will not buy or sell contracts for current month unless they are taking a real short term trade.
Expiry is usually the last Thursday of the month, but do check on NSE site. Usually the contract name tells you when it expires.
I will add a question from my side since SG and at least one more person are active in this thread, or some watcher might know.
There have been 2 times I have been told by my broker that he can not take any orders to OPEN a BUY position as the brokerage has maxed out on their allotment for that scrip. The first incident was when L&T was in the 1100 range, and the latest incident was when SBI was in 2300 range. I was told that NSE rules indicate that any broker may not have more than 5% of the positions, and they were temporarily blocked from taking any fresh positions in those stocks. This usually gets sorted in 2-3 days when the market changes.
I wonder if anyone else has seen this kind of issues !!
The name of my broker starts with K and is part of a big Indian bank.
There have been 2 times I have been told by my broker that he can not take any orders to OPEN a BUY position as the brokerage has maxed out on their allotment for that scrip. The first incident was when L&T was in the 1100 range, and the latest incident was when SBI was in 2300 range. I was told that NSE rules indicate that any broker may not have more than 5% of the positions, and they were temporarily blocked from taking any fresh positions in those stocks. This usually gets sorted in 2-3 days when the market changes.
I wonder if anyone else has seen this kind of issues !!
The name of my broker starts with K and is part of a big Indian bank.
We have 'Market Wide Ban' on Stock Future & Option when it reaches 95% ....which is across All Participants..!!!
Similarly, we have Limits set by the Exchanges for Brokerage Houses (Trading Member) & for Individual Clients
When a Trading Member's Limit is reached none of their clients will be able Trade in that Particular Derivative segment across all expirations.
Kotak..is one very big Hedge Fund in our markets....hence such instances will be witnessed often in many scrips.... I wouldn't believe their statement ...that it is only for a few days......!!!
SG
Similarly, we have Limits set by the Exchanges for Brokerage Houses (Trading Member) & for Individual Clients
When a Trading Member's Limit is reached none of their clients will be able Trade in that Particular Derivative segment across all expirations.
Kotak..is one very big Hedge Fund in our markets....hence such instances will be witnessed often in many scrips.... I wouldn't believe their statement ...that it is only for a few days......!!!
SG
Hi Morkeus,
Please find the short replies below each query...!!!
Brokers are businessmen ... They may not square off your position but will charge you an Interest for the shortfall.
Initial Margin/Span Margin is what is required by the Exchange to open a position.... if at the end of the Day there is a shortfall on Initial Margin then exchanges levy a penalty of 0.5% on the shortfall
Additionally Broker will levy an interest & at times penalty on Shortfall of Initial Margin + Exposure Margin
Correct...!!!
Here one needs to be very clear ... There has to be somebody without exception at the other end of the Trade.
Best part is if Both BUYER & SELLER are Initiating fresh position .... They both think they are Smart....!!!
You will do well.... sooner you get such Logic consigned to the dustbin...!!! Try and Sell 10000 scrips bought earlier ...You will get the point.....
Derivatives income is treated as Business Income and is clubbed with rest of your earnings.... if there is a loss for a particular FY.... then one is allowed to offset in the next filing.... Adityasaraf... is better qualified to answer your Tax....ing questions......!!!
SG
Please find the short replies below each query...!!!
Brokers are businessmen ... They may not square off your position but will charge you an Interest for the shortfall.
Initial Margin/Span Margin is what is required by the Exchange to open a position.... if at the end of the Day there is a shortfall on Initial Margin then exchanges levy a penalty of 0.5% on the shortfall
Additionally Broker will levy an interest & at times penalty on Shortfall of Initial Margin + Exposure Margin
Correct...!!!
Here one needs to be very clear ... There has to be somebody without exception at the other end of the Trade.
Best part is if Both BUYER & SELLER are Initiating fresh position .... They both think they are Smart....!!!
You will do well.... sooner you get such Logic consigned to the dustbin...!!! Try and Sell 10000 scrips bought earlier ...You will get the point.....
Derivatives income is treated as Business Income and is clubbed with rest of your earnings.... if there is a loss for a particular FY.... then one is allowed to offset in the next filing.... Adityasaraf... is better qualified to answer your Tax....ing questions......!!!
SG
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