Futures and Options

POSTED BY TheZionView ON November 18, 2011 8:48 pm COMMENTS (12)

How many have experience in Futures and Options trading.

May be as a hedge to your stocks?

I have few friends make and lose money in F&O without understanding how it works. Just wanted to know the experience of people in here?

Or is it strict no no for F&O?

12 replies on this article “Futures and Options”

  1. TheZionView says:

    @ All

    My interest was never to go in with my pockets deep into F&O. As i stated earlier even if i want to i dont have that kind of money.

    I wanted to know peoples experience in F&O and the effective strategies that has been successfully done by people.

    Also to know whether anyone has used it a Hedge

    @justgrowmymoney and Manish
    Thanks for details explanation though I know i understand way too little

    If your asking am i going to go in there and explore , not at this point in time for sure. But may be in future(may be!)

    Can you all please share some good sites explaining F&O and suggest some books.

    I believe Knowledge is Wealth so will keep learning

  2. Dear TheZionView, after going though all this discussion, do you feel a common investor can understand all the intricacies of F & O?

    To me, in case a common investor wants to take exposure in F & O, MFs offers such arbitrage plans where the underlying money is invested in F & O. I do hope you are aware of these funds.



  3. Abhishek says:

    Options has some good strategies if u keep the emotion of greed away and have discipline in execution.

    This is for the specialist havin time and profound knowledge. For a salaried person, a mutual fund and direct stocks (baÇked by research) are the best ways to c®eate wealth..

    Stay away if u don’t understand. Stick to wat u understand..

    All the best !


  4. I really think that its much better NOT to trade NAKED options in India , like dont buy or sell ONLY PUTS Or CALLS .

    If you are extremelly confident , controlled and knowledgable person regarding stock markets , you can then take some combined strategies like STADDLES and COVERED CALLS or EVEN BUTTERFLY AND CONDORS AND WHAT NOT ! .. But with naked calls and naked puts , there are high chances you will get NAKED your self some day !


  5. Aha – My favourite here!!

    First up – In India Options and Futures are available whose expiry is only 2-3 months away and that too only the most recent expiry has enough liquidity. Which means you are speculating on the price of the option [really the underlying stock/index] in about 20-25 trading sessions at the most.Thus we have these factors working against us:

    1) Understand that the time factor is a major component of the option premium. If Infosys is 2750 today and the premium for Dec expiry for a 2750 call is 60 then in a month from now i.e. Dec 19th, assuming the stock is still at 2750 the premium would be barely 15-20. Thus as time passes the premium decays. If you are still holding the option, BAD LUCK!

    2) We have seen that in spite of stellar results a stock cannot go against the market tide big time. Eg: If the Nifty loses 2% a day and some company posts even 200% rise in NET profit for the recent quarter the stock it may at best go up 3-4%%; most of them will likely close very close to its previous close price red/green in such a market. Again even if results are not around we simply cannnot know where a stock will close in the next 1 month. So speculating the stock/index will go up is a bad decision.

    It is mainly for these reasons that Options trading is fraught with risks.

    I have never indulged in options as hedge for my individual portfolio yet as I dont feel the need to protect my portfolio with every downside in the market (unlike money managers who have to show performance quarter over quarter). However there are 2 ways I do F&O trading. This may not be suitable for everyone and neither do I recommend doing it. [Disclosure: These strategies have made me money and I am net positive in F&O trading in the last 5 years]. Here they are:

    1) I sell covered calls. Taking same example above – If I hold 125 shares of Infosys (1 lot) I may today sell Dec11 expiry calls for a premium of 60. If the premium falls to say, 40 or 30 I buy the call back and pocket the difference.
    Positives: I hold the stock, so even if the stock goes to 3000 I will buy the call back at a loss but sell the stock itself for 3000 and make money. If Infosys falls below 2750 all the premium is mine to keep.
    Negative: If Infosys really goes to 3000 I have lost this gain of 250. However since I got the premium of 60 my actual opportunity loss is 190/share. This simply means: By chasing a mere 60 I ended up with opportunity loss. This may be very painful at times, trust me. Hence I try to sell way a little out-of-money calls. So if I bought Infosys at 2750 I may sell a 2800 or 2850 call, so the chance of the stock rising more than that is lower[ASSUMPTION]. This strategy has made me money almost every time I have deployed this over the last 5 years with very few times the stock being called.

    2) This is a risky bet definitely not to be replicated just for the sake of it: If the US markets closed positive by 2%-3+% the previous night and Shanghai and Singapore are also trading 2% – 3%+, I may buy Nifty options right at the open at market rate and sell them in a few minutes when the gain is even negligible. I mean even few hundred rupees. This is a risky strategy and I have actually lost a few times here [though net positive] but since I hate to hold call options (due to time decay) I sell them immediately when it falls below purchase price thus limiting my losses (Ah, is this not what some of them previously said).

    I would really discard option 2 here[Sorry folks]. Covered calls are the best money making avenues in F&O, IF AT ALL. It is like getting rent on your stock.

    However: Here is my main disclosure. My FnO trading stocks is restrIcted to a very small part of my portfolio and not related to my primary portfolio. I mean both are the same demat account but virtually I have created mental boundaries for them 1- 2 lots at the max. Also profits using covered calls are used for strategy 2 so even if I lose money here it is a loss on the earlier profits. Very rarely do I tap fresh money for strategy 2.

    LEAPS: In the US and much of western world there are instruments called LEAPS which are options of much longer duration – 1-2 years away, say June 2013 expiry. I may be willing to make a bet anytime, that Infosys will cross 3000 in the next 12-18 months than in the next 1 month. This is the only time I really buy CALLS – when there is really sufficient time for the stock to appreciate. Agreed nothing is guaranteed. LEAPS bought in 2007 may be peanuts in early 2009 but over most long horizons if companies do well that will reflect in stock price.

    Derivatives were primarily created as hedges, it is just that we have made them trading instruments!!

  6. Ramesh says:

    In my view, it is a strict no-no.

    1. First you have to invest a lot of time just to understand them (in case you do understand them).

    2. And the more important reason is Futures and Options are NOT investment avenues. The biggest reason for a strict no-no for F&O is that 80-90% of options are not exercised. That means 80-90% times you have lost all of your money. Plus add the intangible costs of ‘stomach churning’ and the extremely large risk of you getting over-leveraged and getting wiped out.

    3. Playing a less-than-zero sum game cannot mathematically be good for the players only for the house (in this case the broker and the bourses).

    4. Its a fallacy to think that Futures are indicative of Future prices.

    Hedging has its own costs. In a secular bull-run, hedge funds are underperformers. while in nowhere-to-go markets or bear markets, hedge funds outperform simple buy-and-hold.

    So, leave F&O for gamblers and speculators and not as some sort of hedging or investing.


    1. Ramesh

      Just one correction , “That means 80-90% times you have lost all of your money” , Why do you said that ? If you dont exercise the option , do you loose money ?

      An option can still be IN THE MONEY and one do not exercise it , still he will get the balance credit to his account after expiry . So its not that NOT Exercising is equal to not making money.


      1. Ramesh says:

        For eg, you pay money to buy a Put option, and in 80-90% cases, that Put option is worthless (whether you exercise it or not). Complicating the already complex matter by call-put or call-put-call and all other mechanisms, straddle, etc, does not help.

  7. TheZionView says:

    I understand it becomes gamble if you dont know what you are doing. I dont have that sort of money to play in F&O.

    I was thinking are there any people here using it as good hedge fund.

    Also to know how peoples experiences have been. Keep pouring people.

    I was thinking of playing it live without money found rediff has good option


  8. Dear TheZionView, I learn my lesson quite early some where around 2007-2008 that F & O is not my Cup of tea, hence totally left that space for qualified people. I’m the firm believer of KISS hence investing my money in MFs, PF & PPF only.



  9. TheZionView

    Hu hu ha ha ha … Here I come !

    I traded Stock options and Nifty options very heavily for 1.5 yrs during 2008- 2010 , I learned a lot through books , some video seminars and I almost thought I mastered it , but I was loosing money overall … And finally I realised that its not “Options Trading” which is tough , but its “Trading” ..

    You can learn OPTIONS in few days , you can learn how options work in few weeks , but you will take years learning trading , how to control your emotions , how to be in control of your system and how to follow your rules etc etc .. long list of thigns here …

    All I would say is that its not easy game to be in and definately not for a novice , dont get into it unless you are very much prepared , it becomes gamble if you dont know the game

    Here is a 90 min great video by Deepak Shenoy , which was done just few days back , yo will learn about options from Indian perspective : http://capitalmind.in/2011/11/video-recording-of-online-webinar-on-options/


  10. Lokesh Jain says:

    F&O is more of an addiction or habit. Very few people take it seriously and just trade without knowing of its consequences. First when people make money, they start liking it, and when it becomes habit, they do overleveraging. This takes a U-turn. Knowing your own limits and stoplosses are very important in F&O. As very few people trade on it as hedge, options actually are very good tool as hedge.

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