investor education on futures and optionscontent.icicidirect.com/mailimages/fno_ikp.pdf · as the...

Investor Education on Futures and Options

About Derivatives

What is Derivative ?

Participants in Derivative Market

Why Derivatives ?

Products in Derivative Market

About Derivatives

Why Derivatives ?





Theoretically…

Derivative are financial instrument that derive their value from other

existing asset classes known as underlying.

The term "Derivative" indicates the instrument derives its values entirely

from the asset it represents be it :

• Equity, forex, commodity, rate of interest or any other asset

• Eg. Sensex, Nifty


Lets Demystify term “Derivatives”…!!!

Simply put, when you invest in derivatives, you actually trade on

whether the value of the asset represented will increase or decrease

in value and within a set period of time.

As the derivative markets deal in speculation, there is a large amount of

risk involved

About Derivatives

Why Derivatives ?




Why Derivatives…???

• It requires much lower initial investment

• Margin as Low as Rs 800 for intraday NIFTY futures at ICICIdiect.com

• You can also use limit created by blocking shares in fnO

• Wide range of instruments available like:

• Index – NIFTY / CNX BANK NIFTY / CNX IT

• Currency - USD / JPY / EURO / GBP

• Interest Rate

• Non-linear Pay-off

• Limited Loss : Unlimited Profit in case of Option buying

• Adjust your Risk : Reward

Ex: Consider a risk-averse individual. He can obviously reduce risk by

hedging. When he does so, the opposite position in the market may be

taken by a speculator who wishes to take more risk.

• Serves as a Hedging tool for your Portfolio

• A tool for short-term Speculation

About Derivatives


Why Derivatives ?




• Hedgers - Hedgers are cautious players who protect themselves from

risk. They use futures for protection against adverse future price thereby

looking to reduce risk for their holdings and interest

• Speculators -Speculators are the high risk takers. They bet on future

movements of prices based on their skill and knowledge levels.

Derivatives give them an extra leverage, by which they can increase both

the potential gains and losses. Speculators always take calculated risks.

A speculator will accept a level of risk only if he is convinced that the

associated expected return, is commensurate with the risk that he is

taking.

• Arbitrageur– Arbitrageurs take advantage of discrepancy between prices

in two different markets. Arbitrageurs keep market prices stable and

reducing possible exploitation of prices. They are typically the most

experienced market players who make fast decisions.

About Derivatives


Why Derivatives ?



Products in Derivatives Market

Derivatives

Futures Forward Options

CALL PUT

Highlighted options are only allowed

trading on Exchange

What is Futures...?

What is Futures Trading

A 'Future' is a contract to buy or sell the underlying asset for a

specific price at a pre-determined time & date.

• If you buy a futures contract, it means that you promise to pay the

price of the asset at a specified time.

For easy understanding, it means that you actually place a trade on

the value of the asset will increase.

• If you sell a future, you effectively make a promise to transfer the

asset to the buyer of the future at a specified price at a particular

time.

For easy understanding, it means that you actually place a trade on

the value of the asset will decrease.

Future terminology

Spot Price - Price at which an asset or underlying trades in the spot market

Future Price - Price at which futures contract trades in the futures market

Contract Cycle - Period over which a contract trades. Derivatives contracts

have one, two and three months expiry cycles. Contracts expire on last

Thursday. New contracts are release on Friday

Expiration Day -Date specified on the derivatives contract. It’s the last

Thursday and the last day for the contract to be traded. Contract will cease to

exist from this day and will be settled at the closing price of the underlying.

Tick Size – Minimum size difference, like 0.05 index point (i.e. Re 0.05 or 5

paise)

Lot Size – Minimum quantity that is available for trade. You can only trade in

multiple of lot size.

Initial margin - Amount that must be required to initiate a futures position

Marking to Market -In futures, at the end of each trading day, the margin is

adjusted to settle the investors’ gain or loss for that day depending upon the

futures closing prices. This adjustment is called Daily MTM

Product Specification

•Futures contracts are designated by the month in which they expire.

•In India, futures contracts in NSE have a maximum trading cycle of 3

months. This simply means that, at any given point in time, one can

choose between contracts of 3 months. They are designated as :

•Near month : Contract expiring in the current month.

•Next Month : Contract expiring in the next month.

•Far Month : Contract expiring in the next to next month.

•For example in June 2015, 3 contracts are available :

Month Expiry Designation

June 2015 Last Thursday, Jun 25 Near Month

July 2015 Last Thursday, July 30 Next Month

August 2015 Last Thursday, Aug 27 Far month

What is Options…?

Option Trading

Theoretically…

• An Option is a contract that gives the right, but not an obligation, to

buy or sell the underlying on or before a stated date and at a stated

price.

• While buyer of option pays the premium and buys the right,

writer/seller of option receives the premium with obligation to sell/

buy the underlying asset, if the buyer exercises his right.

Option Trading

Lets Demystify term “Options”…!!!

Option contracts are available on the underlying asset on various strike

prices divided equally on either side of its spot price.

Options trade like stocks, with buyers making bids and sellers making

offers, the only difference is these bids and offers are for the various strike

price of the underlying.

Investors/Traders trade on these strike prices and therefore strike price has

a value which fluctuates depending on demand supply/movement of the

underlying, which is called a premium.

Premium is a small fraction of the price of the underlying. By paying this

premium we can limit our risk.

Option premium which is different for every strike price. The buyer of the

option pays the premium and the seller receives the premium .When you

buy an option, you have rights. When you sell an option, you have

obligations. That's why option sellers are paid – to accept those obligations.

Options terminologies before entering trade

• Index option -Have index as the underlying

• Stock option - Have stock as the underlying

• Option price / premium - The price that the buyer of an option

contract pays to the seller for entering into option contract

• Open Interest - The total number of outstanding contracts on a given

series or for a given underlying at a particular point in time

• Strike price / Exercise price -Price at which the underlying may be

purchased or sold

• Exercise of Options - Invoke the rights approved to buyer of option

only on day of expiry.

• Assignment of Options -When the buyer of an option exercises his

right on expiry day to buy / sell, a randomly selected option seller (

at the client level ) is assigned the obligation to honor the underlying

contract.

Types of Options

Types of Options – CALL OPTION

Call option: A call option gives the holder (Buyer) the right but not the

obligation to buy an asset by a certain date for a certain price.

For easy understanding, Let’s say we wish to take a BUY position on a

CALL option. In that case, we will have the right but not the

obligation to BUY the underlying asset. So, if the spot price of the

underlying moves against the Strike Price, we can simply let it go, or

refuse to BUY. That’s where the word “Options” comes from.

Long (Buy) call:- A call option is bought by a person who is bullish on

the underlying.

Short (Sell) call:- A call option is sold by a person who is moderately

bearish on the underlying.

Types of Options – PUT OPTION

Put option: A put option gives the holder (buyer) the right but not the

obligation to sell an asset by a certain date for a certain price.

Long (Buy) Put:- A Put Option is bought if the view is bearish on the

underlying. It is also bought to hedge/protect the stock portfolio.

Short (Sell) Put:- A Put Option is sold if the view is moderately bullish

on the underlying

About Derivatives

What does ICICIdirect.com has to offer..?



Why Derivatives ?


ICICIdirect.com – The one stop financial

solution in Derivatives

ICICIdirect.com Product Basket

FnO @ Fingertips

Trading Platforms

Flow of the Presentation

Derivative Research

Customer Service (Call Center)

FnO @ Fingertips


Derivative Research



Trading Platforms

Shares as

Margin

F&O Product Basket

ICICIdirect.com

Broking Products

FnO (Derivatives)

Futures

FuturePlus

FuturePlus Stop

Loss

Options

OptionPlus

Currency

Futures

Currency

Options

Interest Rate

Futures

Shares as

Margin

F&O Product Basket

ICICIdirect.com

Broking Products

FnO (Derivatives)

Options

OptionPlus

Currency

Futures

Currency

Options

Interest Rate

Futures

Futures

FuturePlus

FuturePlus Stop

Loss

In futures trading, you take buy/sell positions in index or

stock(s) contracts expiring in different months. To take

the buy/sell position on index/stock futures, you have to

allocate certain % of order value as margin.

Future

Future Plus

You could take buy/sell positions in future contracts with

the intention of squaring off the position on the very

same day before close of market hours. It attracts lower

Margin

Future Plus

ICICIdirect.com Product -Derivatives

Future Plus Stop Loss

Intraday Position with 0.25% - 4% margin

Position with Compulsory Stop Loss Trigger Price to limit

the loss

Future Plus Stop

Loss

Modify Allocation – Fund Transfer

Before you start trading in FnO, you need to allocate funds from your linked

bank A/C. The same can also be done at the time of order placement.

In futures trading, you take buy/sell positions in index or

stock(s) contracts expiring in different months. To take

the buy/sell position on index/stock futures, you have to

allocate certain % of order value as margin.

Future

Future Trading with ICICIdirect

• You can Calculate the Margin using “Margin Calculator” link

• You can “View your FnO limit” and Best 5 Bid / Offer

• You can also Allocate Funds

Futures Open Position

• It shows your Margin Details for each of your positions. “Margin on

Position” is the blocked amount

• Ensure that the “Available Margin” > “Minimum Margin”

• You can Square-off / Rollover / Convert to FP

Future Plus

You could take buy/sell positions in future contracts with

the intention of squaring off the position on the very same

day before close of market hours.

Future Plus Stop Loss

Intraday Position with 0.25% - 4% margin, as low as Rs 800

Position with Compulsory Stop Loss Trigger Price

Future Plus

Future Plus with Stop Loss

Future Plus Stop Loss – Open Position

• See your all FPSL open positions in this page

• It shows your unrealized P/L for your individual position as well as

Grand Total for all your open positions

• You can square-off your position by clicking on “Modify”

Shares as

Margin

F&O Product Basket

ICICIdirect.com

Broking Products

FnO (Derivatives)

Futures

FuturePlus

FuturePlus Stop

Loss

Currency

Futures

Currency

Options

Interest Rate

Futures

Options

OptionPlus

Options is trading on Index or Stocks contracts expiring in

different months with various strike prices. Suitable for

investors who prefer to cash in - on the trends in market, for

the purpose of high returns

Options

Placing order in Options

You can create Short Position with nominal Margin

Limited losses, as position taken with compulsory Stop loss

Trading in option attract lower STT

No overnight risk

Option Plus

• It shows your unrealized P/L for your individual position as well as

Grand Total for all your open positions

• Click on “SquareOff at Market” to exit from the position

Option Plus– Open Position

Shares as

Margin

F&O Product Basket

ICICIdirect.com

Broking Products

FnO (Derivatives)

Futures

FuturePlus

FuturePlus Stop

Loss

Options

OptionPlus

Currency

Futures

Currency

Options

Interest Rate

Futures

F&O Product Basket

ICICIdirect.com

Broking Products

FnO (Derivatives)

Futures

FuturePlus

FuturePlus Stop

Loss

Options

OptionPlus

Currency

Futures

Currency

Options

Interest Rate

Futures

Shares as

Margin

Source of Margin

There are 2 sources of Margin which you can use:

1. Cash Margin

2. Shares as Margin (SAM) - Limit against Shares

Salient Features of SAM

• Instant Securities Limits available against Shares Blocked as Margin.

• Trade in Equity and F&O segment with Zero Cash Limits

Benefits

• No charges to be paid to Block or Unblock

• SPOT Sell facility is instantly available for the blocked securities.

• Cash Sell order can be instantly placed for the securities which are

unblocked /reduced.

Shares as Margin (SAM)

Securities limit is used as a margin for taking exposure in FnO

ICICIdirect.com gives first preference to the limit created by blocking the

shares at the time of taking Positions in FnO. Once this limit is

exhausted, it uses the Funds available in your FnO Allocation

Please note that funds will be required for the following instances:

• Settlement dues arising from MTM losses on Futures positions

• Premium payments for Options bought

• Square off losses on Futures

• Brokerage (inclusive of other charges) applicable on the transactions.

You can block your securities with

ICICIdirect.com to create Limit for trading in FnO

No charges

Unblock your shares instantly

Shares as Margin


Trading Platforms


Derivative Research


FnO @ Fingertips

FnO @ Fingertips

Traders require information to take trading Decisions.

This module provides you access to exclusive coverage of FnO

activities at your Fingertips

You get to see the following data:

• Snap-shot of Futures / Options Market

• FII Derivative Activity

• OI Heat Map

• Put Call data

• Advance Decline Ratio

• Sector Watch

• Event Calendar

• Screeners

• Unusual Activities

http://172.16.13.97/find20/Derivatives/FNOFuture/FutureMarkets

FnO @ Fingertips


FnO @ Fingertips

Trading Platforms



Derivative Research

Derivative Research

For Intraday Traders

• Daily Calls – On the basis of Technical Analysis

• Daily Derivatives – On the basis of Derivative Activity

• Daily Support & Resistance – Based on Prev. day’s O-H-L-C

For Positional Trades

• Weekly Calls – On the basis of Technical Analysis

• Weekly Derivatives – On the basis of Derivative Activity

Sample – Daily Derivatives Report

• FnO Highlights : Previous day’s Derivative activity

• Index Outlook : Expectation for the day, Trading Range, Levels

Research Recommendations : iClick-2-Gain


FnO @ Fingertips


Derivative Research


Trading Platforms

Web-based Platforms

Trading Platforms

ICICIdirect.com Website

Low Bandwidth Site (LBS)

Trade Racer Web

Applications

Trade Racer (Desktop App)

Mobile Apps for

Web-based Platforms

Trading Platforms


Trade Racer Web

Applications


Mobile Apps for


ICICIdirect.com New Website

Web-based Platforms

Trading Platforms

Trade Racer Web

Applications


Mobile Apps for




• This site is especially made

for Mobile Browser where

the user can enjoy seemless

trading experience.

• User can also access this on

desktop with slow internet

connection.

Web-based Platforms

Trading Platforms

Applications


Mobile Apps for

Trade Racer Web



Trade Racer Web

• Web-based application with Live Streaming

• Customize your Screen with multiple Widgets and Market Watch

• Stock alerts

Web-based Platforms

Trading Platforms

Applications

Mobile Apps for




Trade Racer Web


• Live Streaming Quotes + Upto 5 Market Watch.

• Advanced Market Scanners and Charting Tool

• Customize your Desktop.

Applications

Mobile Apps for

Web-based Platforms

Trading Platforms



Trade Racer Web


Mobile Apps

For Android For I-Phone For Windows

• Mobile Phone Apps are available for Android, I-phone and Windows

• Live streaming + Order Placement + Open Positions tracking


FnO @ Fingertips



Trading Platforms

Derivative Research

Call N trade

Click to Call

• Receive a free call back from our representative on your registered

mobile number

• They will assist you with the queries related to trading, product features

and will also assist you on using ICICIdirect.com website

• You need to login and click on the icon “Click to Call”

• Trade effortlessly over the phone with Call N Trade

• You can place trades instantly with dedicated numbers and 2 step IVR

• This facility is especially useful for those of our customers who are on

the move or prefer to trade over phone

Metros and Tier I Cities : 3355 1122

Other Cities: 3355 112

https://secure.icicidirect.com/NewSiteTrading/customer/includes/C2C/ClickToCall.asp

What about trading charges…?

Brokerage Plans


FnO @ Fingertips


Trading Platforms

Derivative Research

Innovative Brokerage Plans

You have the flexibility to choose any of the below

mentioned brokerage Plan that suits your trading

needs

• Life time Prepaid Plans

• 195 Plan for Option traders

• I-Gain Plan for Intraday FnO Traders

Prepaid Plans

• You pay an up-front brokerage which will be valid for 15

years

• Choose from 7 different plans starting from Rs.10,000 to Rs.3

Lacs

• You also get 18 - 84% savings on your brokerage depending

on the card you have selected

195 brokerage Plan

195 brokerage Plan

• Brokerage will be levied depending on the number of lots for

which order is placed.

• Orders for 1 lot will be charged brokerage Rs 95.

• Orders for more than 1 lot upto 10 lots will be charged flat

brokerage of Rs195

• Orders for more than 10 lots would be levied brokerage of

Rs195 and incremental Rs15 per executed lot above 10 lots.

For eg if you place an order for 15 Lots, you would be charged

Rs195 + Rs 15*5 (incremental traded lot above 10 lots) = 270

Hence your effective brokerage is Rs18 per traded lot.

Please note that the positions which are squared off intraday

would be levied aforesaid brokerage.

http://content.icicidirect.com/mailimages/option-19d-dec11.htm

I-Gain Plan for Intraday traders

• This scheme is valid only

for the intra-day trades

done in Nifty contracts in

stop loss products namely:

• Future Plus Stop Loss

• Option Plus

• Brokerage will be charged

only on the intraday legs of

profitable trades

• Calculation of profit or loss

will be done at order level

http://content.icicidirect.com/mailimages/i-gain-launch.html

Traders Strategies

1. Optimistic Trader

• Very optimistic about decision

• Invest in full at a particular point

2. Linear Trader

• Semi Active Trader

• Invest equal quantity at every fall in market

3. Non Linear Trader

• Active Trader

• Invest more quantity at every fall in market

Optimistic Trader

Linear Trader

Non-Linear Trader

Derivative Trading Risk

Derivative Trading Risks

• Since Derivative works on leveraging, the traders are

exposed to higher profits as well as the potential of higher

losses. You may lose your capital

• Always maintain sufficient free limit to provide for Margin

amount as and when required to avoid the broker to close out

your position

• Before trading on F&O, you should ensure that:

• You have understood the trading and settlement mechanism of

the exchange

• You can lose more money than you have invested

• You would not be tempted to over leverage your positions

• You can protect yourself by knowing how F&O Trading works.

Judge for yourself whether it is prudent for you to trade on F&O

in light of your financial resources, investment objectives, and

tolerance for risk.

Thank You

investor education on futures and optionscontent.icicidirect.com/mailimages/fno_ikp.pdf · as the...

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