Stock Futures are futures contracts where the underlying asset is an individual stock. Stock Future contract is an agreement to buy or sell a specified quantity of underlying equity share for a future date at a price agreed upon between the buyer and seller. The contract is traded on an exchange and contract specifications like market lot, expiry day, unit of price quotation, tick size and method of settlement are standardized. Stock futures give investors increased capabilities to leverage themselves within the market.
What are the opportunities offered by Stock Futures?
Stock futures offer a variety of usage to the investors. Some of the key usages are mentioned below:
Price Discovery - The prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of the underlying to the perceived future level. The prices of stock futures normally converge with the prices of the underlying stock at the expiration of the contract. Thus stock futures help in discovery of future as well as current prices. Investors can take long term view on the underlying stock using stock futures.
Leverage - Stock futures offer high leverage. This means that one can take a large position with less capital. As the investor will have to pay only the margin (which forms a fraction of the notional value of contract), his return on investment will be higher than on an equivalent purchase of shares.
Arbitrage - Single stock futures offer arbitrage opportunity between stock futures and the underlying cash market. Such opportunities to earn risk-less profit arise as the futures may look overpriced or under priced compared to the spot.
Hedging - An investor with position in cash segment can minimize either market risk or price risk of the underlying stock by taking reverse position in an appropriate futures contract. This hedging facility offered by single-stock futures makes them an effective risk management tool.
Increase in Trading Volumes - Transfer of risk enables market participants to expand their volume of activity. With the introduction of single stock futures, the market of the underlying stock also witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of arrangement to transfer risk. Speculative trades also shift to a more controlled environment of futures market.
How are Stock Futures different from Stock Options?
* Right vs Obligation - In stock options, the option buyer has the right and not the obligation, to buy or sell the underlying share. In case of stock futures, both the buyer and seller are obliged to buy/sell the underlying share.
* Risk-return profile - Risk-return profile is linear or symmetric in case of single stock futures whereas in case of stock options payoff is non linear or asymmetric.
* Influencing Factors - The price of stock futures is affected mainly by the prices of the underlying stock whereas in case of stock options, along with prices of the underlying stock, the volatility of the underlying stock will also affect the price of the option.
* Premium � Futures do not have any price or premium. Only the strike price of the stock moves. Option contracts have a price or premium attached to them. This premium or price of the option moves, while the strike price remains fixed.
* Risk � In case of futures, both long and short positions are at risk. In case of options, only short position (of an option writer) is at risk.
What are the profits and losses in case of a stock futures position?
The payoff for a person who buys a stock futures contract is similar to the payoff for a person holding the stock in the cash market, with a potentially unlimited upside as well as a potentially unlimited downside. The exact profits and losses would depend upon the difference between the price at which the position is opened and the price at which it is closed.
Let us consider an example. Investor �X� has a long position of one April Stock 'M' Futures @ Rs.320. If X squares up his position by selling the April Stock 'M' futures @ Rs.345, the profit will be Rs. 25 per share. In case X squares up his position by selling the April Stock 'M' futures @ Rs.300, the loss will be Rs. 20 per share.
On the other hand, let us assume that X has sold the April Stock �M� futures short @ Rs.330. If he squares up his position by buying April Stock �M� futures @ Rs. 300, his profit will be Rs.30 per share. In case X squares up his position by buying April Stock �M� futures @ Rs.345, his loss will be Rs. 15 per share.
How does an investor who has the underlying stock, use stock futures when he anticipates a short-term fall in stock price?
The holder of the physical stock can sell a future to avoid making a loss without having to sell the share. Any loss caused by the fall in the price of the stock is offset by gains made on the stock future position.
What are the different contract months available for trading?
1, 2 and 3 month contracts are available for trading in Stock Futures.
As an investor, how do I start trading in Stock Futures?
To start trading in Stock Futures, all you need to do is open an account with us.
You can start your trading immediately by depositing upfront the initial margin for the contracts you want to trade in.
