Excellent Trading School - 7 - Futures and Option Introduction.

Introduction to Derivatives or Futures and Option and Index 
Stock prices fluctuate continuously during any given period. Prices of some stocks might move up while that of others may move down. To identify the general trend in the market (or any given sector of the market such as banking), it is important to have a reference barometer, which can be monitored. Market participants use various indices for this purpose. An index is a basket of identified stocks, and its value is computed by taking the weighted average of the prices of the constituent stocks of the index.

The term ‘Derivative’ stands for a contract whose price is derived from or is dependent upon an underlying asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest bearing security or a physical commodity.

Introduction to Futures

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. These are basically exchange traded, standardized contracts.

The buyers of futures contracts are considered having a long position whereas the sellers are considered to be having a short position.

Difference between NIFTY spot and NIFTY futures

Difference between spot and futures tells the story of traders, if there is premium on futures meaning, futures price is more than spot, means traders are bullish in the market, Future sellers are demanding their pound of flesh from the futures buyers .

if there is discount on futures, means futures price is less than spot, it means, majority of the traders are bearish, and are betting the price to fall down in futures, thats why they are selling at the best possible price to buyers, hats why difference grows, if there big crash or so, and discount narrows when there is rally.

Should I take profit now?or Some part of it.

In FnO segment its always better to book profit Full than part booking, because, the risk element in FnO is huge compared to normal shares(where u buy now and sell later any date)