Thursday, September 06, 2007

Futures and Hedge

For eg

If you buy 100 Infosys Oct'07 futures for say Rs 1900 and you expect go to 2,000 - you will make a profit of ( 100*100) = 10,000.

However - u will lose a HUGE amount if Infosys tanks to Rs 1600 ( 100*300= 30,000) .

You can hedge yourself by buying a PUT option of infosys at say 1950 at Rs 30 at the cost of Rs 3000 .

The profit that you make when Infosys touches 2000 will be (10,000 - 3000).=7000

However - if the Infosys tanks to Rs 1600 - then your Put Option will be worth ( (1950-1600)*100 less premium paid 3000 ) = 32000 profit,while u wud have limited your futures 30000 loss with a risk free profit of 2000

Same can be done by selling a stock futures ( = Short Futures) and then buying a CALL option to hedge against price of shares going up.

If stock tanks - you make a lot of money, since u already sold futures at high rate.

Avoid buying or selling futures without a hedge,as it can/will lead to bankruptcy.

1 comment :

Navnnit said...

Hi Jaggu,

This was very simple to understand, however if the intricacies of OPTIONS are more elaborated, then one could understand the overall concept better and hedge their positions... Anyways, thanks a lot for such an informative post and such detailed NIFTY tech. analysis... Keep the good work.

Navnit

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