A derivative means a financial instrument that gets its value from its underlying asset. Nifty Futures is a form of derivative, the underlying asset of which is the Nifty50 index. With a rise in the index value, there is a corresponding rise in the value of the futures contract and vice versa. The Nifty futures contract allows the buyer or seller the right to buy/sell the derivative on the Nifty50 index on a future date at a predetermined price.
Nifty50 happens to be one of India’s most traded and therefore most liquid futures contracts. Let’s learn more details about the Nifty Futures.
Under the Nifty Futures contract, there are two options:
With a call option, the contract owner has an option to buy a Nifty index within a given time and as per the price mentioned in the contract. The owner is not obligated to execute the option.
2. Put
A put option is just the opposite of a call option, in that, the contract owner has an option to sell a Nifty index, but is not obligated to execute the option.
Here’s an example to easily understand the functioning of a Nifty Futures contract.
Nisha, an investor, believes that the Nifty index may rise from its current trading price of Rs. 17,700. So, what does she do?
She buys one lot of Nifty Futures with a margin placed at a small percentage of the contract’s cost. She thereby gains access to 75 shares. This makes Nisha eligible to receive these shares from the seller, Rahul, for Rs. 17,700.
Now, Nisha’s estimate turns right, and the share goes up to Rs. 17,800. Since she opted for a Nifty call, Nisha can buy the shares from Rahul at Rs. 17,700 and resell them at Rs. 17,800. Thereby she can fetch Rs. 100 as options premium income per share. Since she owns 75 shares, the sale income adds up to Rs. 7,500.
In case, however, if Nifty futures fall to Rs.17,600, Rahul has the option to sell the futures to Nisha at Rs. 17,700. Thus, she may incur a loss of Rs. 100 on every share bought.
Did you know?
Here are some quick facts on Nifty Futures:
Here are some important points to note while trading in Nifty Futures:
Futures contracts offer many advantages to all kinds of investors whether speculative or otherwise. However, highly leveraged positions combined with large contract sizes may also result in huge losses, even with small market movements. Thus, an investor should always strategize and carry out due diligence before trading in Nifty futures to understand both the advantages and the risks involved.
To buy Nifty futures, you must reach out to a broker and open a trading account. This type of trading does not require Demat accounts. These contracts are available for trade on both NSE and BSE. Since NSE makes for a highly liquid derivative platform, most investors prefer to invest in Nifty futures through NSE.
Some of the reasons why futures trading can be beneficial are, these contracts are well regulated, the positions in these are leveraged, and these are highly liquid due to a large number of market participants.
Nifty futures contracts have three key durations, the near-month or 1 month, middle-month or 2 months and far-month or 3 months.
Nifty futures contracts are settled by executing an opposing transaction on or before the day of expiry. There is no actual buying or selling of the underlying asset and therefore no physical settlement.
Since Nifty futures contracts are based on margin trading, small speculators can participate and trade in these by paying a small margin, thereby limiting their loss.
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