Queries regarding F & O basic terminology

[beginner_av]

HI,
some enlightenment here

*my broker charges 25% margin irrespective of whether i am dealing in stock options or stock futures, is that the norm? i do not have anybody to guide me amongst my family or friends as they stay out of the stock market,but from reading books i gather that margin for futures is significantly less than that for options,so is my broker charging too much margin?

The exchange specifies the min margin reqd based on SPAN margin...ur broker can charge as much as he wants upto 100%, depending on how much risk he is willing to take, but usually they dont do so. Index options and futures carry the least amt of margin.


*i have bought ITC NOV futures at 189 rs,so what happens in OCT expiry? do i have to carry forward my position by telling the broker or will it get done automatically?

You dont have to do anything. If u had bought Oct FUT, squaring off OCT FUT and buying NOV FUT is a rollover.

* what does carry forward position in futures mean? suppose at nov expiry ITC futures is trading at premium of 6 rupees---does it mean that i now have to pay 6 rupees /share extra to keep my position intact? what if it is trading at a discount of 6 rupees? do i pocket it?

At expiry, there cant be any premium and discount...the FUT and SPOT (stock) price become the same. But b4 expiry, futures are settled daily...if there's an increase by 6 rupees, irrespective of increase of premium or increase of stock price, u'll receive it AT THE END OF THE DAY (i.e tomorrow..T+1). If it falls, the amt will go from ur account each day.

*in the same vein, what is meant by negligible cost of carry?

Simply When Spot and FUT price has very little difference, (mathematically F = S * e ^ RT..where S = spot price, R = rate of int and T is time.)

*to square off my position i can SEll nov ITC futures anytime i want,right?

YES u can

 

[vince]

Keertimannan,

Thats a pretty long list of questions . lets see what we can do.

Margins vary from broker to broker, ask around to get the best deal.Margins are the same irrespective of futures or options.

If you have purchase ITC oct fut @ 189 on expiry you will be payed / or will have to pay difference between 189 and closing spot price on expiry day.If you want to roll over your position to the next month you have to buy the next series.

Premium or discount of fut price is with respect to the spot price, you do not receive or pay anything.

http://www.investopedia.com/terms/c/costofcarry.asp Check out this link for cost of carry.

You can square off your position at any time.

Fno is normally a traders/hedgers game, whereas medium to long term investors do buy stock. It depends on your perspective and your comfort levels.

Taking a position in futures does not entitle you to any dividend payouts.

Futures contracts are valid only for the month you take a position for, whichever it is. So you will be charged brokerage accordingly.

Margin is liable on all short option positions. Long option positions attract no margin.

I hope I have been of some help.

Regds

 

[beginner_av]

And now more nirvana

*Experts in F&O,please tell me what you think of owning futures instead of stock--according to my thinking---

#if i buy ITC1125 shares at 190 it will cost me approx 2 lacs14 thousand Rs,with the advantage fo dividends and 0% long term capital appreciation tax but with the risk of capital erosion in case of a market fall.

True, only if u hold it for more than a year. Then why dont u write some covered calls to use ur stock to earn some money. If u r terrified u can buy put too.

#if i buy ITC futures at190,it will cost me 50,000 Rs (Margin that i have actually paid) . If ITC goes up , i get the profit on 1125 shares while i have actually paid capital on only 250 shares (250 X 190 = 47,500).

Very true...and then when it goes down ...see what u've written below.

#if ITC goes down , i need to have the capital to take care of the mark to market requirements---ideally it should be equal to the exposure ie 2 lacs but practically even if the market nose dives it is difficult to imagine ITC losing 50% of its share value--so 75,000-100,000 rs should be enough to keep in reserve in short term fixed deposits and another 1 lac in 3-5 yr FD which can be broken if required.

True...but must remember 25000 loss on 1 lakh means u lose 25% of capital...but for stocks it means on 2 lakhs it is a 12.5% loss. U may lose good amt of money every time if u roll over ur future at a high premium (say 3 - 4 Rs which equals to 36 to 48). Of course if u get it at a discount...u gain and prices remain stable u gain.

*what is the effect on futures in case of a large dividend payout?

NOTHING...it will quote at S-D + P at the month of giving dividend where S is stock price, D is dividend, and P is premium ie for 10rs dividend at 200 rs stock for 4 rs premium, fut price will be 200-10+4=194, when stock is at 200.

*do you think keeping futures position intact for months or years in lieu of actually holding the shares is wise given the loss of dividends and 0% long term capital appreciation tax and need to carry forward position at each expiry with resulting increased brokerage costs.

ans is above...


* can brokerage be reduced by taking positions every alternate month--for ex: in oct take nov futures and in the end of nov take jan futures and so on?does it make a difference ?

ya...but why do u want to buy fut if u dont want to trade them? or any other strategy?

* my broker asks me to pay margin even on a call option sold against the futures (covered call),inspite of my showing him the book by ashwani gujral(how to make money trading derivatives) and R Mahajan(F&O--introduction to equity derivatives) which state explicitly that no margin is required to be paid on the sale of a call option in case of covered call( in which either shares or futures are owned ). I asked indiabulls but they also said the same---do you know a broker who does not ask for margin on a covered call? what do i do?

I know in the US..not here...these greedy pigs...why FUT, they ask for margin even if u have the stocks...anyone knows anybody?

 

[keertimannan]

Thanks a ton, beginner av and vince for helping me out.

Beginner av,as for your question,---why do u want to buy fut if u dont want to trade them? or any other strategy?---i am influenced by udayan mukherjee of cnbc who in passing commented that you do not have to own shares you can own futures and R Jhunjhunwallah who in an interview stated that trading futures is the way of funding buying shares---this set me thinking on futures as both these guys are very intelligent and they hold futures in good esteem---this is not to say that i will be as successful (ha ha)but only that futures should be looked into and understood --which is what i am striving to do --plus i have the funds to to care of M to M requirements even if ITC falls.
I also have a real life experience of holding one lot SHARES of Arvind Mills bought for the purpose of selling covered calls---however the share value of Arvind Mills has fallen drastically over last few months ---the money invested in these shares is stuck for now and to add insult to injury the lot size has been doubled ---so my very purpose of buying shares to sell covered calls is defeated. In such a scenario ,i would have been much better off if i had bought FUTURES of Arvind Mills since at the 52 week low of 50 Rs i would still have 50 X 2150 (old lot size)=107500 Rs in my bank account which i could have put to better use----by buying shares i have nothing in the bank. Of course you can point out my faults like
*Why did i choose a stock like arvind mills(because i had observed that it did not move too much prior to buying it---boy,what a mistake!)
*why did i not use stop loss (because covered call can be sold at the buying price for a neat sum even if the stock falls 20-25%,for ex:buying price 100,call can be sold at strike price 100 even if the price falls to 80 Rs---and i made the classic mistake of assuming that it can fall 20% and no further or even if it does fall further it will rebound soon (ha ha ho ho!)
*why don't i use technicals ---because i am a novice still trying to make sense of it all.
*why did i not buy puts---because i did not beleve that it would fall so much and because i do not know much about technicals i could not predict its fall and protect myself .

I have narrated the above sorry saga to highlight the difference between owning one lot size shares outright and owning futures---which is that futures allow you to have significant money in the bank even if the stock falls .This is strictly for novices as experts will use all methods,strategies and technicals to avoid such a situation.

 

[keertimannan]

hi,

waiting for inputs on above post

 

[vince]

Keertiman,

Since your focus seems to be on covered calls, this strategy pays well as long as the stock is ranging or moving up. However when the stock starts breaking supports and collapses the covered call writer has to have a predetermined cut off point where he has to get out of this position.

The simplest way is to square off both sides of the trade.

Those who are good at technicals would simply sell the stock/ futures and ride the naked call to expiry.

By the way are you aware that a naked short put would acheive the same results as a covered call at half the margin requirements.

All the best.

 

[coolblue]

hi,
some more queries----

*my broker charges 25% margin irrespective of whether i am dealing in stock options or stock futures, is that the norm? i do not have anybody to guide me amongst my family or friends as they stay out of the stock market,but from reading books i gather that margin for futures is significantly less than that for options,so is my broker charging too much margin?

*i have bought ITC NOV futures at 189 rs,so what happens in OCT expiry? do i have to carry forward my position by telling the broker or will it get done automatically?

* what does carry forward position in futures mean? suppose at nov expiry ITC futures is trading at premium of 6 rupees---does it mean that i now have to pay 6 rupees /share extra to keep my position intact? what if it is trading at a discount of 6 rupees? do i pocket it?

*in the same vein, what is meant by negligible cost of carry?

*to square off my position i can SEll nov ITC futures anytime i want,right?

*Experts in F&O,please tell me what you think of owning futures instead of stock--according to my thinking---

#if i buy ITC1125 shares at 190 it will cost me approx 2 lacs14 thousand Rs,with the advantage fo dividends and 0% long term capital appreciation tax but with the risk of capital erosion in case of a market fall.

#if i buy ITC futures at190,it will cost me 50,000 Rs (Margin that i have actually paid) . If ITC goes up , i get the profit on 1125 shares while i have actually paid capital on only 250 shares (250 X 190 = 47,500).

#if ITC goes down , i need to have the capital to take care of the mark to market requirements---ideally it should be equal to the exposure ie 2 lacs but practically even if the market nose dives it is difficult to imagine ITC losing 50% of its share value--so 75,000-100,000 rs should be enough to keep in reserve in short term fixed deposits and another 1 lac in 3-5 yr FD which can be broken if required.

*what is the effect on futures in case of a large dividend payout?

*do you think keeping futures position intact for months or years in lieu of actually holding the shares is wise given the loss of dividends and 0% long term capital appreciation tax and need to carry forward position at each expiry with resulting increased brokerage costs.

* can brokerage be reduced by taking positions every alternate month--for ex: in oct take nov futures and in the end of nov take jan futures and so on?does it make a difference ?

* my broker asks me to pay margin even on a call option sold against the futures (covered call),inspite of my showing him the book by ashwani gujral(how to make money trading derivatives) and R Mahajan(F&O--introduction to equity derivatives) which state explicitly that no margin is required to be paid on the sale of a call option in case of covered call( in which either shares or futures are owned ). I asked indiabulls but they also said the same---do you know a broker who does not ask for margin on a covered call? what do i do?

------hoping to get some enlightenment from experts

thanks

Regarding your last point- this concept you are mentioning is called cross marging. ie not charging margins for hedges using differnt products ex writing a option and taking a future position in the oposite direction to hedge. However this concept of cross margining though widely prevalent in western markets is not allowed in India as yet.

 

[mfire]

Hallo,
I have a querry if I can use this thread,
I read a strategy to buy Nifty 3700 call at around 40 and buy 3650 put at around 40. The breakeven points were 3778 & 3572.
My query is that when can I square this position? Am I required to square off both legs same time or I can sell one by one accoding to profit position.
Mfire

 

[keertimannan]

Hallo,
I have a querry if I can use this thread,
I read a strategy to buy Nifty 3700 call at around 40 and buy 3650 put at around 40. The breakeven points were 3778 & 3572.
My query is that when can I square this position? Am I required to square off both legs same time or I can sell one by one accoding to profit position.
Mfire

possibilities-

1Nifty stays between 3650 and 3700 at expiry-you lose your entire premium paid,however if you feel that the nifty is not going to bless you by moving, then you can salvage some money by selling (squaring )off both positions BEFORE expiry

2 Nifty ends either near 3780 or 3570(breakeven points) --you lose premium on one end while gain on the other but the difference between the two still gives you a loss(albeit a smaller one ) or if you are lucky ,maybe no profit no loss at expiry,if you feel that this scenario is more likely ,again, you can salvage some money by selling off both positions BEFORE expiry(you can also sell only one position if you so wish , it is entirely upto you). Be careful of the brokerage and make all calculations taking brokerage also into account

3 if you move into a profitable position due to big nifty movements,then you have to decide whether to ride it to expiry or take your profit and run,you can keep the profitable end open and close the other end if you feel that the market is going to keep moving in the same direction OR you can close the profitable end if you are getting a nice profit and close the other end (after seeing that the money you get is more than the brokerage which will be charged,if not then you can just let it go) ,or you can even keep the other end open if you feel that the market is about to do a U turn(first take your profit on the profitable end )

you can square off the positions any time you want either both at the same time or one at a time depending on what you percieve the market movement to be.your positions will be squared off automatically at expiry by the exchange.

l

 

[mfire]

Thank you Keertimannam.
Your reply has cleared many confusions in my mind. I am used to deal on only one side and I thought this strttegy could give more comfortable position but due to your reply I could know dangres hidden in it.
Once again thanks for prompt reply.
Mfire