Hello All:
What are the advantages/disadvantages of Futures/Options versus Cash? Which one of the derivatives (Futures or Options) is better for short term/long term investors and day traders?
What is the difference between buying 2000 shares in cash market versus buying a lot of 2000 shares in Futures and Options?
Thanks
In options/ futures gains are bigger.
Say, u bought 2000 shares of reliance at CMP of 2000. Your total invested capital = 2,000*2,000=40,00,000.(Note u have to have 40 lacs in ur demat acc at the time of making this investment)
Now say when u sell reliance shares, it has appreciated to 2200. Then ur total profit = (2200-2000)*2000=4,00,000 on an investment of 40 lakhs.
So, profit % = 4 lacs / 40 lacs *100 = 10%
Now, considering the same in futures/ options mkt:
Say reliance shares are avalaible at a lot of 1000 shares. U buy 40,000 1 month CALL option of ril at say a strike price of 2100 @ Rs 100 premium. Pls note that at the time when u enter this contract u need to have (premium * no of contracts) i.e. in this case, 100*40000(=Rs 40,00,000) in ur acc. So in F&O with the same amt of money ur purchasing power increases manifold.
Now lets consider, after u made all these buying, the price of RIL heads northwards. It crosses 2200 after 10 days. From 2200 onwards u'll start making profit although ur purchasing price was 2100. This is bcoz ur effective purchasing price will become ur actual strike price+premium. That's 2100+100 = 2200. Say, at the end of the month the price went to 2300. Then ur total profit will be Rs 1,000*40,000*100 = 40,00,000. And ur investment was 40 lacs. So ur profit % = 100%.
So ur profit % will always be greater in F&O then in equities if u risk the same amt.
Hope this clears ur doubt.