Friday, February 22, 2013

Excellent Trading School - 8 - Futures Trading System


Futures and Options Trading System

The futures & options trading system provides a fully automated screen-based trading for Index futures & options and Stock futures & options on a nationwide. It supports an order driven market and provides complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment.

Futures Terminology
• Spot price: The price at which an underlying asset trades in the spot/cash market.
• Futures price: The price that is agreed upon at the time of the contract for the
delivery/closing price of an asset at a specific future date.

• Contract cycle: It is the period over which a contract trades. The index futures contracts on the NSE have one-month, two-month and three-month expiry which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading.

• Expiry date: is the date on which the final settlement of the contract takes place.
• Contract size: The amount of asset that has to be delivered under one contract. This
is also called as the lot size.

• Basis: Basis is defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract.

In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. If its above spot price, its called Futures premium, if its below spot price, then its said to be futures in discount.

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.
 
• Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.
• Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. This is called marking-to-market.

• Maintenance margin: Investors are required to place margins amount with their trading members before they are allowed to trade. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.
To trade in futures, one must open a futures trading account with a broker. 

Buying futures simply involves putting in the margin money, which enables the futures traders to take a position in the underlying security without having to open an account with a securities broker. With the purchase of futures on a security, the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future (the expiration date of the contract). Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder.
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