Traders with a view on markets and a risk appetite can take exposure to the Nifty by paying just a fraction of the index’s value through Nifty options and futures.
1. What are Nifty futures and options?
Nifty futures are a contract that gives its
buyer or seller the right to buy or sell the Nifty 50 index at a preset price
for delivery at a future date. Nifty options are of two types —call and put
options. A call option on Nifty gives a buyer the right, but not the
obligation, to buy the index at a predetermined price during a specified time
period. Similarly, a Nifty put gives its buyer the right to sell the index. A
seller of the options is obliged to give or take delivery of Nifty from the
buyers. In practice index futures are cash settled, like their European
counterparts.
2. How does a Nifty futures and options
contract work?
Suppose trader A feels Nifty will rise from 18700,
He can buy one lot (75 shares) of Nifty futures by putting a margin at a
fraction of the contract cost. His counterparty trader B sells her Nifty at
that level. If Nifty rises to, say, 18800 A has the right to buy the index at
18700 from the counterparty and sell it to him at 18800, gaining Rs 5000 (100×50).
If the Nifty futures fall to 18600, B sells the futures to A for 18700 even
though Nifty trades at 18600, which means the buyer faces a Rs 100 a share
loss.
