What it means
Each contract covers a fixed number of units called a lot, set by the exchange and revised from time to time, and expires on a set day. Buying an option costs its premium; futures and option selling need margin. Only stocks that meet SEBI's tests for size and liquidity are allowed in the segment.
Example
A Nifty option quoted at ₹120 with a lot of 65 costs 120 × 65 = ₹7,800 to buy, plus charges.
In practice
Traders use futures and options to take a view on an index or a stock with less money than buying the shares would need, to profit from falling prices, and to protect a portfolio. Index options are by far the most traded, because buying one costs only the premium.
A plan starts with the lot. Multiply the lot size by the distance to your stop to get the rupees at risk, and choose the number of lots from that figure, not from the margin available.
What to watch for
This is where most individual traders in India lose money: SEBI's studies put the share of losers at about nine in ten. Leverage, the daily loss of value in options and the cost of frequent trading all work against a small account.
Related terms
5 terms- Futures contractA standardised agreement to buy or sell something at a set price on a future date, traded on an exchange.
- OptionA contract giving the right, but not the obligation, to buy (call) or sell (put) at a set price before a set date.
- Nifty 50The benchmark index of India's National Stock Exchange, tracking 50 of the largest companies listed on it.
- Expiry dayThe day a futures or options contract stops trading and is settled; after it, the contract no longer exists.
- STTSecurities transaction tax: a tax the Indian government charges on every trade made on a stock exchange.