The topic of Futures and Options has come up quite frequently in comments and emails but I’ve never done a post on them till now because the posts got too long. There are two types of Derivatives commonly traded in the market – Futures and Options, and within Options there is further a Call option and a Put option. The price of these derivatives is based on an underlying asset, and the price of the derivative usually moves in tandem with the price of the underlying. So, that means the price of Infosys futures or Infosys options will depend on the price of the Infosys shares. While there are other reasons, I think two big reasons are leverage and taking short positions. But you can sell a future, call option or buy a put option to take a short position in the stock or index. The third common reason I hear is hedging risk, and while I agree that it is a big reason for institutional investors, I just can’t see how retail investors can efficiently hedge with derivatives.

I think the big difference between buying derivatives and buying a share in the cash market is that your investment can go to zero a lot more frequently in the derivatives market than in the cash market, and only those people who have a high risk appetite and who can stomach losing a lot of money should invest in derivatives. That being said, they can be quite profitable as well because they give you the ability to profit from short positions and add leverage. I think the bottom line is that you should only invest that amount of money in derivatives that you are comfortable in losing. I’ll stop this post here, and in the next part of this series build on what it means when A you say the price of a derivative depends on the underlying. More over if you want to have trade derivative , then commodity market is a better place because their price is rangebound.
I also traded in currency future in MCX-SX but wild depreciation of rupee gave me loss(i shorted) few month back.
I think you are true saying that commodity future market is better in trading point of view,as prices have a great support around the production value and is a good buying opportunity if anyone takes informed decisions about it…Of course sometimes these levels are not honored as what happened in 2008.

Here is the first part with some very basic and easily digestible information on futures and options. Options and Futures give you a lot of leverage and you can make (or blow up) a large amount of money in a short period of time with the same amount of capital than you can with a regular cash position.
If you want to take a bet that a particular company will do badly, and then profit from it then you can’t do it very easily in the cash market.
The notional values of derivatives is often too high, and the expiry periods too short to act as an efficient hedge for small investors.
My idea is that at the end of this series there should be 8 or 10 posts, and each about 500 words and on a specific topic.

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