Trading in F&O -
the high risk and high reward equation!
Trading in F&O is a ‘calculated
risk’ game.
In this segment, a higher degree of conviction, discipline and
tolerance level is required. Oh yes, the EGO should be limited too.
Basics of Futures
trading:
1.
In futures the lot size of stocks and index
is fixed, so you buy in LOTS. Link to Lot size and day wise Margin
2.
The capital requirement varies from stock to
stock but a healthy balance of Rs.1Lk at the least should be set aside for
trading in one lot! This lot should of Rs. 30,000 to Rs.60,000 cost.
3.
This difference of 40,000 or so will act as
cushion when traded contract price falls against your expectation.
4.
Trading cycle: Futures contracts have a maximum of
3-month trading cycle - the near month (one), the next month (two) and the far
month (three). New contracts are introduced on the trading day following the
expiry of the near month contracts. The new contracts are introduced for a
three month duration. This way, at any point in time, there will be 3 contracts
available for trading in the market (for each security) i.e., one near month,
one mid month and one far month duration respectively.
5.
Expiry day: Futures contracts expire on the last
Thursday of the expiry month. If the last Thursday is a trading holiday, the
contracts expire on the previous trading day.
6.
The contract of future looks as follows
a a) JSWSTEEL 30Oct2014 which means, the future of stock “JSWSTEEL”
will be valid till 30th Oct 2014.
b) NIFTY 27Nov2014 which means, the future of index “NIFTY” will
be valid till 27th Nov 2014.
7.
On the last day of expiry, we should “SQUARE-OFF”
(sell) our positions.
8.
The position can be created in two forms viz LONG when you
assume that the price will rise from current levels and SHORT when
you assume that the price will fall from current levels.
9.
The current market price is known as the SPOT
Price. The future price when trades above the spot level, we say “the future is
trading at ** points premium to spot”. And when the future price trades
lower than the spot price, we say “the future is trading at ** points discount to
spot”.
10.The overall number of
positions in the particular scrip (Index or stock) is called as Open interest.
11.When open interest increases
to a significantly high level (80%-90%) SEBI puts a ban on trading on that scrip.
Usually, HDIL easily attracts Ban level. In such case, buying is prohibited and
attracts fine in addition to brokerages and taxes.
12.The changes in open interest
can be read in following manner:
a.
Increase in open interest and Increase in future’s
price = Long positions created.
(Bullish scenario)
b.
Increase in open interest and Decrease in future’s
price = Short positions created.
(Bearish scenario)
c.
Decrease in open interest and decrease in future’s
price = Long positions squared off. (Bearish scenario)
d.
Decrease in open interest and Increase in future’s
price = Short positions squared off. (Bullish scenario)
But, if A unwinds his position of 10 futures, then open interest will decrease by 10, because these contracts cease to exist. Instead, if A sells these to another trader C, then the open interest remains unchanged since it is C who holds the contracts now
Price
|
Open Interest
|
Interpretation
|
Rising
|
Rising
|
Market is Strong
|
Rising
|
Falling
|
Market is Weakening
|
Falling
|
Rising
|
Market is Weak
|
Falling
|
Falling
|
Market is Strengthening
|
14. Increasing open interest means that new money is
flowing into the marketplace. The result will be that the present trend (up,
down or sideways) will continue.
Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest can prove useful toward the end of major market moves.
A leveling off of open interest following a sustained price advance is often an early warning of the end to an up-trending or bull market.
15. There are various strategies in trading in
Futures segment. Which will be covered later.
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