short selling equity futures : what is the exact risk

[sieger007]

Hi
There was one question that has always bugged me regarding futures.
When I am doing an unhedged Futures shorting for some company knowing that the price will fall down, then , in that case to my understanding this is selling a promissary note for something you don t have.
What exactly is the risk over here ? can someone explain :
As I understand the risk is = ( The Price at which you short - Price currently trading for the futures ) X Market Lot . Is there any other kind of risk ?
What if the buyer excerises the future and asks for delivery ? what do I do then ? is this kind of situation possible and considered risk or Exchange will not allow physical delivery until futures contract ends . Pl clarify.

Are the same rules applicable for NSE Index and COMDEX Commodity futures ?

 

[AnandK]

Whenever you sell an option, your risk is unlimited and your reward is limited (to the premium you receive).

Technically your risk is limited to your loss x number of units in the contract. There is no other loss.

However selling options when done in a disciplined manner coupled with proper protective trading techniques and sound money management is no riskier than buying options.

Options are decaying assets. They lose value each day that the underlying stock to which they are attached re-mains unchanged or moves in a negative direction. The magnitude of daily losses depends on many factors but the primary one being the behavior of the underlying stock. An option buyer (versus an option seller) is faced with this dilemma and can only be a winner if he correctly determines the movement of the stock and the magni-tude of the move. If the market moves in the opposite direction or if it does not move at all, the option buyer is a loser. The option buyer must not only correctly foretell market direction but his prediction must be accompanied by a major move in the market. A less than significant move will still result in a loss for the option buyer.

On the other hand, the option seller takes maximum advantage of the decaying characteristic of options. As an option seller he merely sits and waits for the option to lose value daily to the point of being worthless on expira-tion day. He does not need to correctly predict market direction to generate profits. If he sells puts, he is a win-ner if the stock stays flat, a winner if the stock goes up. He can only lose if the underlying drops far enough to hit past his strike price position. This means that even if the stock goes down he is still a winner if the move is not far enough to hit his strike position. If he is a call seller, he wins when the stock drops, stays flat or moves up less than significantly. Admittedly, during the validity period of the option until its expiration date, the option seller faces the potential threat that the underlying stock may move continuously against him past his strike po-sition, in which case there would be no limit to his loses. But this can only happen if the seller is careless enough not to watch and monitor his position on a regular basis!

Source: http://www.articleclick.com/Article...s--In-Naked-Option-Selling-Is-A-Myth-/1010752

 

[sudoku1]

the risk is xactly the same of when one buys into cash delivery

 

[Capricorn]

Hi
There was one question that has always bugged me regarding futures.
When I am doing an unhedged Futures shorting for some company knowing that the price will fall down, then , in that case to my understanding this is selling a promissary note for something you don t have.
What exactly is the risk over here ? can someone explain :
As I understand the risk is = ( The Price at which you short - Price currently trading for the futures ) X Market Lot . Is there any other kind of risk ?
What if the buyer excerises the future and asks for delivery ? what do I do then ? is this kind of situation possible and considered risk or Exchange will not allow physical delivery until futures contract ends . Pl clarify.

Are the same rules applicable for NSE Index and COMDEX Commodity futures ?

Futures are cash settled. No physical delivery is involved

 

[mahesh2007]

Hi
As I understand the risk is = ( The Price at which you short - Price currently trading for the futures ) X Market Lot . Is there any other kind of risk ?

Yes and apart from it,Brokerage and taxes are deducted from your profit and added to loss.

What if the buyer excerises the future and asks for delivery ? what do I do then ? is this kind of situation possible and considered risk or Exchange will not allow physical delivery until futures contract ends . Pl clarify.

stock Options are excercised and not the stock future.
In India F&O is cash settled while in US it is delivery settled.
In India u dont have to give/take delivery in F&O.

Are the same rules applicable for NSE Index and COMDEX Commodity futures ?

Try googling or ask in commodity section