WealthChaser Global Research

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 Preface
Knowledge is power and this stands perfectly true in the Financial
Markets. Markets are changing every second and one needs to be
updated on the changing markets and be prepared to combat the
challenging market scenarios.

As a Business analyst every aspirant should be very crystal clear on the

market fundamentals and should know the working of markets to the
core.

This module is designed keeping in mind the specific requirements of

the clients and would empower the team in understanding the
complete dynamics of the Indian financial markets.

The module starts with the capital market operations, Trading,

settlement in Equity cash segment , added to the description of Equity
derivatives and Commodity derivatives trading.
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 Contents
I. Capital Markets
 Indian Financial Market system
 Primary Markets
 Secondary markets
 Trading
 Index
 Clearing and settlement
 Corporate Action

II. Future Segment

 Introduction
 Derivative Segment
 Forward Contracts
 Future Contract
 Trading, Clearing and settlement

III. Options
 Basics of options
 Components- Call, Put
 Contract Specifications- Moneyness, Intrinsic Value, Time value component
 Trading- Buying & Selling

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 Contents
 Clearing and Settlement
 Advantages & Disadvantages of Options
 Return on Investments for Future vs options contract

IV. Commodity Derivatives

 Commodity basics
 Commodity Vs Equity Vs Equity Derivatives
 Type of Commodities
 Factors affecting commodity prices
 Trading in commodities
 Equity Market

Financial market like any other market is a system, where trading in

financial instruments takes place. This system is now completely
automated through electronic interfaces and consists of many buyers
and sellers, with their individual objective of entering in Financial
Market.

This system must be the government recognized system.

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 Segment Counter
Equity Shares / Stocks/ Scripts
Equity Derivatives Shares/ Index / Indices
Commodity Derivatives Bullions/ Base Metal / Energy/ Agri

Why traders, trade in Financial Instruments?

Traders trade in financial instruments to earn profit, from ups and
downs of financial Instruments prices.

Example :- Mr. A have Rs. 1000 for trading. He bought shares of SBIN
which has present price of (Rs 250 per share). He bought 1000 shares ,
after few days share price of SBIN rise to (Rs 252 per share ).He sold
his 1000 shares and earned a profit of Rs 2 per share, his total profit is
Rs 2000.

What is Equity market ?

The market where shares are traded is known as equity market. It is
also known as the stock market/capital market. “Stock market is the
market where trading of shares/stocks/scripts takes place.”
Equity market is divided into primary and secondary market.

Primary Market :
• When promoter of a company issue shares first time to the public to raise
funds, that market is known as Primary Market and the process by which
shares are issued in the Primary Market is known as IPO (Initial Public
Offer).

Secondary Market :
• Issued shares in IPO are tradable on exchange. Any existing shareholder
who want to sell his shares and any new investor who want to buy shares,
both the parties have to approach Exchanges for buying and selling of
shares, this market is known as Secondary Market.
 Day -1

Participants of Financial Market :

Regulator

Traders Exchange

Sub- Main
Broker Broker
Regulator :
Regulator is one who regulates the market, decides the do’s and don'ts.
Prepare rules and regulation, handle grievances for the proper
functioning of the financial market. All participants of financial market
(Exchange, Brokers, Traders) work under the guidelines given by a
Regulator.

SEBI : Securities and Exchange Board of India is the Big Boss of Financial
markets and the main regulator in the Capital Markets, SEBI regulates
Equity Markets and Currency Derivative segments, came into power in
1992 .
RBI : Reserve Bank of India mainly controls the Banking and monetary
systems in the Country making Monetary policies, looking after the
working of Banks. They regulate Currency Derivative Segment along
with SEBI.

FMC :Forward Markets Commission along with SEBI regulates

Commodity Derivatives in India.
Exchanges:
Exchanges provide a facility for traders to exchange (Buy/ Sell) Securities,
Commodity derivatives , Currency derivatives via an electronically
driven platform . They act as a mediator between buyers and sellers.
• Equity Exchanges:
– NSE- National Stock Exchange
– BSE- Bombay Stock Exchange
• Commodity derivatives Exchanges:
– MCX- Multi Commodity Exchange
– NCDEX- National Commodity and Derivative Exchange.
• Currency derivatives Exchanges
– MCX- SX
– NSE Currency Derivative
– USE
Stock Exchange :
A stock exchange or share market is a corporation or mutual organization
which provides facilities for stock brokers and traders, to trade company
stocks and other securities.
 Day -1

There are 2 recognized & Leading Stock Exchanges in India for Share
Trading
• BSE- Bombay Stock Exchange
• NSE- National Stock Exchange

BSE : Bombay Stock Exchange is the oldest stock exchange in Asia with a
rich heritage. What is now popularly known as BSE was established as "The
Native Share & Stock Brokers' Association" in 1875, there are around 5700
+ shares listed on BSE.

NSE : National Stock was incorporated in November 1992 and currently

has around 1659 + shares listed and has a trading facility for Cash,
Derivative and Currency derivative products.

The highest turnover in Indian Equity markets happen on NSE currently.

These are an Electronic platform based trading exchanges graduated from
the traditional OTC ( over the counter) mode of trading.
 Day -1

Brokers/ Intermediaries :
Body which acts as a interface between the client and the financial System
and facilitates the proper trading in Financial Products like India Infoline,
Sharekhan, Religare, ICICI Direct, Angel Broking.

Sub Broker:
A sub broker is like a ' Franchisee' of a stock broker registered with SEBI
and can act like and on behalf of a Broker i. e. Open Trading account and
service clients, in turn he gets a sharing out of the total brokerage earned
from the clients trading under the Sub Broker.

Investors and Traders:

These are the makers of the market, the real end client for whom the whole
system exists. All the products and systems in Financial Markets are
designed keeping in mind these real Investors and traders of the System.
These Comprise of all the Indian Retail, HNIs, Institutional Clients ( FII’s
and DII’s) trading in the Indian Financial Markets.
Trading Mechanism:
Trading & Demat Account: Any trader who wants to trade in equity
markets need to open a Demat and trading account with a SEBI registered
Broker/ Sub Broker by filling up a KYC ( Know your client) form with
necessary documents.
Trading account is used for the purpose of trading which stores
information regarding the Buy, sell price, average price, Limits, Profit and
loss statement of the client.

Demat account acts as a warehouse to store shares bought through the

trading account of the Client, demat account is an electronic account
similar to the bank account the only difference being a demat account is
used to store Dematerialized shares of a company.

Contract notes Every investor has a right to get a contract note which is
like a bill of your trading for the day which includes the name of the share,
quantity, time of trade, brokerage levied, net delivery amount, Taxes etc.
Market Segments
Equity
Market

Equity
Equity
Derivative
Cash
s

1300 + Equity Equity

shares are
Futures Options
tradable

167 + shares ,
Index ,
Indices
Trade Timings :
The normal trading time is between 9:15 am to 3:30 pm Monday to
Friday.
Pre-open
• Decide the opening price of the markets
Session

Normal Trade
timings • From 9:15 am to 3:30 pm

Closing price • Average price between 3:00 to 3:30 pm, this

calculation calculation takes place between 3:30 to 3:40 pm
daily

Post close • The post close trading happens between 3:40 pm to

trading 4:00 pm, basically used for squaring off some
positions created by mistake
Initial Deposit :
An amount needed in trading account in order to trade.

Initial
Deposit /
Security
Amount

Intraday Non Cash

Hard cash deposit
limit (limit against
in trading acc.
Demat holdings)

Intraday
Intraday
limit 4 to 8
limit 4 to 8
times on
times on ID
NCL
 Leverage / Limit / exposure :
Limit is a credit Facility given by a Broker to a trader for intraday
trading only. It differ from broker to broker . Generally it is in the
range of 4 to 8 times . Limit is given by the broker on the Initial
deposit.

Ex: If a client has 50,000 Credit balance in his Trading account he can
get limit upto 4 lakh ( 8 times 50,000). NCL (Non cash limit)

NCL is the limit given to the trader by broker by keeping shares as

security. Remember this is only an intraday limit.
An offline trader normally gets more limit/ leverage than an online
trader.
Difference between Online and Offline trading accounts

Points of Difference Online Offline

Trade execution Self Dealer

Trade mode Desktop/Laptop Phone / Physical visit

Trading, reports, fund

Options available Only trading
transfer, etc .

Time saving Huge Late order punching

Types of trading :
Trading in Equity markets can be divided in the following modes.

Trading
Modes

Holding Trend

Buy/ Short/
Intraday Delivery
long sell
Intraday:
When a trader Squares off (closes the transaction) in the same trading session, here
the trader would get an intraday trading limit/ leverage / exposure on his deposited
amount.
Profit credited in T+2 working days and loss debited the same day. Where T stands
for present trading day.
Delivery Trade:
A trade where the trader does not square offs his trading position the
same day .
There are 2 types of delivery trade:

Delivery
Trade

Buy delivery Sell delivery

trade trade

Receives Ownership
ownership Receives
transfers in
Pays FTV in T+2 FTV in T+
T+2
same day working 2 working
working
days days
days
Buy/ Long: A trader with a bullish ( upward movement) view on the stock buys
the share first and then sell

Ex: A trader is bullish on Reliance Industries trading @ 800, he buys 100 shares at
10:30 am @ 800 and then sells 100 shares @ 2:00 pm at 810 (remember it is not
always that a client can sell his shares on a profit).

Short sell: This is a very unique concept, where a trader sells a share first
(without owning that share in his demat account, neither took buying position
first) and then buys it back, the trader has a bearish view on the stock here.

Ex: A trader is bearish on DLF limited, which is currently trading at 200, he sold
1000 shares @ 200 at 10:30 am and bought back 1000 shares @195 at around 3 pm,
making a profit of Rs 5000.

Here the trader has to take huge care that he squares off his trading position before
the close of the market. In order to avoid shortage which leads to Auction.
Clearing and settlement :
It is a process which complete electronic trade done through exchange .
In this process buyers and sellers fulfill their obligations.
Buyer give full amount of shares bought and receive delivery of shares
from seller and seller get the amount of sold shares.
This process is known as clearing and settlement. Clearing and
Settlement Period of NSE/BSE is T+2 Days.

BTST: Buy today sell tomorrow, is a technique mainly used to take the
advantage of the movement in the stock for 1 day, especially when a
news/event is awaited to happen on a particular stock.

STBT: Sell today and Buy Tomorrow, here the trader sells a stock today
and buys it tomorrow, this CANNOT be done in Cash segment.
Gap up opening:
If the Opening price of a Stock/Index is more than the previous Day’s
closing prices.

Gap Down opening:

If the Opening price of a Stock/ Index is less than the previous Day’s
closing prices.

Tick size:
The minimum movement allowed for a share on either side, the tick size
in Equity markets is 0.05

Ex : A share currently quoting @ 100, the next minimum movement of

the stock can be 100.05.
Types of Orders :
Market Order: Trade executed on current market price.

Limit Order : Trade executed on the traders wished price (may have range).

Stop Loss Order: A special order to fix the loss in unfavorable condition. Every stop
loss order needs to put in a trigger price and a Limit price
- Trigger price - which specifies the price point where
the order will enter the trade and not before that.
- Limit price- which specifies the price point where
the order will end the trade and not after that.
There are 2 types of SL order :
• Sell SL Order: Placed when bought first
• Buy SL Order: Place when sold first.
Status of Orders:
Executed Order – trade confirmed, cannot cancel or modify, need to square-off.
Pending/ Outstanding Order – not yet executed, can be canceled or
modified

Modified Order – modification in quantity of shares or price.

M to M – Mark to Market
This shows real time profit and loss of a trade.
Broker will increase the limit / leverage if customer is in Profit
M to M

Floatin
Booked
g
Trade executed
Trade executed
yet to be square
and square off
off
Order Matching criteria :
Order matching process is a price/ time priority order matching
mechanism, where priority is given to price and then time.

Order Matching criteria for a Buyer

Trader A Trader B Trade Executed
Order of buying 100 shares Order of buying 10 shares of Trader B - due to high price
of ABC @ 100 at 9:30 am ABC @ 100.05at 9:30:01 am punched

Order of buying 100 shares Order of buying 100 shares Trader A - due to same
of ABC @ 100 at 9:15 am of ABC @ 100 at 9:15:02 am price, time is considered.
 Day -3

Order Matching criteria for a Seller

Trader A Trader B Trade Executed
Order of selling 100 shares of Order of selling 100 shares of Trader A - due to low price
ABC @ 100 at 9:30 am ABC @ 100.05 at 9:30:02 am punched

Order of selling 100 shares of Order of selling 100 shares of Trader A - due to same price,
ABC @ 100 at 9:15 am ABC @ 100 at 9:15:01 am time is considered

Circuit Breakers :
To prevent price manipulation in share prices, exchange introduced
Circuit breaker system. In this system daily price band of stocks is pre
decided by exchange on the basis of previous day Closing price.

Upper Circuit - Price touch to the upper band.

Lower Circuit - Price touch to the lower band.
 Day -3

Price Bands/ Market protection

Daily price bands of 2%, 5% ,10% and 20% (either way) on previous
days closing price.
Ex: The closing price of a stock on Monday was 100, the price band
currently applicable to the stock is 20%, the upper circuit limit for the
stock would be 120 and lower limit would be 80.

Note – Circuit breakers are not applicable on shares which are also
available for trading in derivative( F&O).

Technical Points:
Support :- Support is a Technical price point where stock price may stop
to fall due to increase in Demand of a Stock . S1 ,S2,S3
Resistance - Resistance is a Technical price point where stock price may
Stop to rise due to increase in supply of a stock . R1,R2,R3

Support and Resistance levels are decided by Research analyst

What is an Index :
Index is composite Structure which represents the broader view of Stock
market. It is calculated on the weightage of Selected Stocks .

Stocks Selection criteria in Index :

• Market Capitalization -(Total number of Shares issued * Current market
Price ).
• Liquidity - share should have high average Trading Volume.
• Diversification - All selected shares are from 23
different sectors.

Index :- Measures the stock market movement based on a group of

selected counters or sectors.
• NSE – Index is Nifty 50 ,comprises of 50 companies from 23 different
sectors.
• BSE – Index is SENSEX comprises of 30 companies.
Sectorial Indices: Represents performance od specific sector. Nifty Bank,
Nifty Auto, Nifty Energy, Nifty Infra, Nifty Pharma, Nifty IT, etc.

Weightage in Indices: Every shares in the index has a fixed weightage

which affects the movement of broad index.
Ex : If Reliance Industries has a weightage of 10 in Nifty, a 1 Rs move in
Reliance would make an impact of10 points ( either up or down) in Nifty.
Note: Index and Indices are not tradable in Equity Cash segment, they are
tradable in Equity Derivatives.

Corporate Action:
Listed companies conduct several corporate actions for shareholders during
a financial year which includes dividend, Bonus, split, merger, etc
Dividend:
A profit of the company, which company share it with its shareholder. It is
the % given on the Face vale of a share.
Record date: When a company declares a dividend, it sets a record date
when you must be on the company's books as a shareholder to receive the
dividend. Companies also use this date to determine who is sent proxy
statements, financial reports, and other information.

Ex- date: Once the company sets the record date,the ex-dividend date is
normally set for stocks two business days before the record date. If you
purchase a stock on its ex-dividend date or after, you will not receive the
next dividend payment. Instead, the seller gets the dividend. If you
purchase before the ex-dividend date, you get the dividend.

Bonus : It is a reward, to the shareholders in the form of addition in number

of share. The current shareholders simply receive new shares, for free, and
in proportion to their previous share in the company.
For example, the company may give 1 bonus share for every 5 shares held.
Share split: If the price of ABC ltd before share split is 1000, the
company announced a share split of 1:10 ( 1share to be divided in 10
shares) the shareholder would get 10 shares in place of 1 share and the
price post split would be Rs 100. Share split can take place in any ratio.

Merger : When two company decided to work jointly, then it is worth

less to be have separate names and management, so they merge
together to form a single entity.
Equity Futures

THANK YOU

CAPITALVIA GLOBAL RESEARCH LIMITED

Introduction
Derivative markets are a non-delivery based segment in NSE, unlike the
cash segment there is no delivery in the Derivative markets and STBT is
very much possible, traders can hold their position till expiry by paying
margin amount i.e. 10 to 20 % of full transaction amount.

Derivatives Segment - Derivatives is an instrument which is derived

from some Underlying Asset and its movement depends on the
movement of the underlying Asset also known as Spot price. Traders
trading in cash segment can fill up a single page form for F&O trade
activation.

The underlying asset can be equity, forex, commodity or any other asset,
the settlement price of a derivative is based on the stock price of a stock
which frequently changes on a daily basis.
Derivatives introduced in Indian Stock Exchange in June 2000.
Day - 5

Derivatives

Forward
Contract

Futures Options
Derivatives Derivatives

Call Option
(CE)

Put Option
(PE)
Forward contract is the simplest mode of a derivative transaction. It
is a face to face agreement to buy or sell an asset (of a specified
quantity) at a certain future time for a certain price. This is an OTC
(over the counter) market. Exchange does not come into the picture
while going for Forward contract deals.

Future/ Derivative Contract – A future contract is an agreement

between two parties to buy or sell an asset at a certain time in the
future at a certain price.

Example - Index futures are all futures contracts where the underlying
is an Index (Nifty or Sensex) and helps a trader to take a view on the
market as a whole.
Points of Difference Cash Segment Future Derivatives

Delivery of shares takes place for No Delivery of shares for

Delivery
positional trades positional/intraday trades

Limit 4- 8 times on ID 2- 5 times on ID

Can get against shares hold in

NCL Can get against shares hold Demat Demat

Delivery trade - Full payment is to Initial Margin ( 10- 20%) and

Margin
be made Mark to market Margin

BTST is possible, STBT not possible

BTST/STBT BTST and STBT both allowed
in Short sell trade

No concept of Auction as no
Auction Auction in case of share short
ownership
 Points of Difference Cash Segment Future Derivatives

Lots Can trade in minimum 1 share Counter traded in Lots

Contract Cycle No contact cycle 3 months contract cycle

Last Thursday of the contract

Expiry No expiry , hold till life time
month

Possible along with 167

Trading in Index /Indices Not possible
approx. shares

Intraday – 0.01% Intraday – 0.01%

Brokerage
Delivery – 0.10% Positional – 0.01%

Settlement T+ 2 working days T+ 1 working days

NIFTY Future: Nifty future is the most traded contract on NSE Derivative
segment, with a lot size of 75

Bank NIFTY: Bank Nifty ( Bankex) future contract is derived from the Bank
nifty spot Index which represents the Banking sector stocks, lot size being 30 .

SGX Nifty: NSE and Singapore Exchange has signed a cross listing agreement,
where Nifty Future is listed on Singapore exchanges termed as ‘ SGX NIFTY’.

Stock Future: Future contract on Stocks, currently there are 167 Future
contracts on NSE Derivative segment. No circuit Limits is applicable on Stocks
(167) under Derivative segment

NSE will provide at least 3 month expiry contracts, all the times on the NSE
Derivative platform
Margin : Every trader has to deposit an Initial Margin (Initial Deposit)
with the Broker before trading in a Future contract, the margins are
designed on the SPAN ( Standard portfolio analysis of risk) Methodology
which covers exposure risks of the trader. The margin varies from 10-20%
respectively charged on the basis of the Volatility of the script. 10 to 13 %
in Index and 18 to 20 % in Shares.

Ex – A trader has Bought 1 lot current month Nifty future @ 8000, paying
10% margin ( Lot size- 75)
Total transaction value : 1 * 75* 8000 = 600000/-
10 % margin : 600000 * 10 % = 60000/-

Settlement All trades in the futures market are cash settled on a T+1. The
closing price of the index/stock futures will be the daily settlement price
and the position will be carried to the next day at the settlement price.
• The daily settlement ( MTM) takes place on the closing Future price,
until the trader squares off his position or the final settlement ( on expiry
day) happens at the closing spot price of the Index/ stock.
If the trader keeps his position open till the expiry, there is no penalty and the exchange
will close his position on the closing spot price on the underlying.
M to M is of 2 types :
Booked M to M – Position is squared off ( it is calculated on the price at which the
position is squared off).
Floating Positional M to M – Positions yet to be squared off ( In case of positional trade
profit and loss is marked on the basis of closing price of future market.
Ex - A trader has Bought 1 lot current month Nifty future @ 8000 paying 10% margin (
Lot size- 75) Lets see his daily MTM obligation on the basis of previous closing prices

Trade Hold Future Closing Price Positional M to M

(8020 – 8000)
Day 1 8020
20 * 75 = 1500 +
(8030 – 8020 )
Day 2 8030
10 * 75 = 750 +
(8000 – 8030 )
Day 3 8000
- 30 * 75 = 2250 -
Types of Traders as per the intention
• High risk and high return , these traders trades in
the hope of making quick and large gains.
Speculators
• They generally trades on Intraday basis.

• Make an investment to reduce the risk of adverse

Hedger
price movements in an assets.

• They simultaneously trade same assets in 2

different market ( Cash and Future) OR (NSE
and BSE) with an intension to earn risk free
Arbitrager fixed Profit. These conditions arises due to price
difference of same assets in 2 different markets.
Roll over: A process of squaring off the current open position and
taking the same directional position in the next series of the Future
contract, with same number of lots and in same script.
Ex: A trader has Long 10 lots of Nifty Future on 25th Sep 14 ( Expiry
day), he is still bullish on the contract, he sells his Sep month contract
and simultaneously buys 10 lots Nifty in Oct month.

Open Interest: The total number of outstanding contracts or open

position which are yet to be squared-off as on date .

Ban Period: Ban Period is introduced in order to control open interest

in the Market. Exchanges have prescribed a MWPL (Market wide
position limit) of every future contract in the Exchanges, If the open
Interest of the contract reach 95% of the MWPL limit Ban period will
get introduced and when decrease down to 80% of MWPL ban period
will lift up.
Equity Options
Introduction: Day -7
Options, as the name suggests gives huge kind of options to choose while
the trader wants to trade in derivative contracts .

• Gives right but not the obligation for the option buyer.
• 167 approx. Stock, Index & Indices are tradable.
• Limited loss ,Unlimited profit to the option buyer
• Buyers have to pay full premium amount upfront. Seller has to pay
margin i.e. 10 to 20 % of Full transaction value.
• Different strike prices are available in different Contract Cycle.
• Useful in all kinds of markets Bullish, Bearish, Volatile, Stable.
• Intraday and positional trade allowed.
• 3 months contract cycle . Hold positional trade till contact expiry.
• No Auction as no ownership.
• BTST and STBT possible.
 Day -7
Difference between option buying and selling
Difference Buying Selling

Margin equal to the future

Payment Premium amount
contract( relatively higher)

Limited to the premium

Loss potential Unlimited
paid
Limited to the premium
Profit potential Unlimited
received

Effect of decrease in time

Negative Positive
value

M to M Not paid Needs to pay when in loss

Buyer of an option is known as “ holder” and Short seller is

known as “writer” .
Types of OPTIONS
Day -7
• Call Options
• Put Options.

Call option : A Call option is a contract between two parties giving the taker
(buyer) the right, but not the obligation, to buy a lot of shares .To acquire this
right the taker pays a premium to the writer (seller) of the contract.

Put Option : A Put Option gives the holder of the right to sell a specific
number of shares of an agreed security at a fixed price for a period of time.

Strike Price – Betting points are known as Strike Price

Premium – Amount paid by buyer to trade in options (CE or PE) premium has
2 components namely Intrinsic value and time value.
 Day
Premium = Intrinsic Value + Time Value
-7
Intrinsic Value = Premium – Time Value

Intrinsic value of an option is the real worth of that option as on date,

intrinsic value cannot be less than 0
Calculating Intrinsic Value for a call = Spot – Strike ( only for ITM Call
options)
Calculating Intrinsic Value for a put = Strike –Spot (only for ITM Put options

Time value of an option is the component charged by the seller for the risk
he takes for the time left to expiry of the contract, this is also known as risk
premium of an option contract.
The time value component of an option decreases every day till the expiry
date approx. by 5 %. Time value of the option is near to 0 at expiry time.
 Day - 8
Difference Between CE and PE
S.No Call Option Put option

When to buy Cash market seems bullish Cash market seems bearish

When to sell Cash market seems bearish Cash market seems bullish

Premium Increases Cash market goes up Cash market goes down

Premium decrease Cash market goes down Cash market goes up

BEP Strike Price+ Premium Strike Price - Premium

Intrinsic Value Spot Price – Strike Price Strike Price – Spot Price
 Day
Option style : There are 2 option –
styles 8
American: All the options which can be exercised on or before the expiry
date, currently Indian Derivative markets follow only European style of
options, abbreviated as CA (Call American) , PA ( Put American)
European: All the options which can be exercised only on the expiry day,
currently both the stock and index options are in European style
Types of Strike Prices:
Types Call Put

Intrinsic value positive /S.P less then Intrinsic value positive/ S.P more then
ITM
Spot Price Spot Price

ATM Equal to OR near to Spot price Equal to OR near to Spot price

Intrinsic value negative i.e. 0 / S.P Intrinsic value negative i.e. 0 / S.P less
OTM
more then Spot price then Spot Price
Settlement Day -8
Exiting Option contract: There are 2 ways to exit an option contract
• Square off: The trader squares off his position opposite to the entry side
• Exercise: The buyer asks the seller to pay the amount equal to the
intrinsic value, here the settlement prices is the closing spot price of
the Stock/ Index.

There is no roll over in options contract

Why Trade in options ?

1. Low Investment required
2. Limited Loss
3. Can trade for Bullish and Bearish views
4. No Delivery obligations
 Day - 9
CRM Session

Quality Session

Assessment - 1
Commodity Derivatives
Introduction
Commodity trading in India is from the primitive times which transformed from
the old barter system to the current modern derivative form. Commodity trading
in India is done in physical markets (mandis) and through Electronic Trading
platforms like MCX, NCDEX.
The Regulator for this segment is FMC – Forward Markets commission along with
SEBI (Securities and exchange board of India).

Types of commodities
• Agriculture commodities: All those commodities which are produced via
agricultural activities like Wheat, Guar, Soyabeen, cotton, turmeric etc.
• Base Metals: Metal commodities used mainly in Industrial production units like
Copper, Zinc, aluminum, nickel, Lead
• Precious metal: Commodities which are used as an Investment and are precious
in nature like Gold, silver
• Energy: Commodities which are used as an Energy source like Crude oil and
natural gas
 Comex, Nymex and LME are world largest derivatives
exchanges.
Worlds MCX Gold
COMEX –
Largest and Silver
Bullion Derivatives Gold and MCX Prices
Spot Prices are
Silver
Market derived

Worlds MCX Base

Largest LME – MCX Metal
Base Metal Derivatives
Spot Base Metal Prices Prices are
Market derived

Nymex –
Worlds MCX NG
Crude Oil
Largest and Crude
Energy Derivatives and MCX Prices
Spot oil Prices
Natural
Market are derived
Gas

Commodity Exchanges in India

There are mainly 2 commodity exchanges in India
MCX- Multi commodity Exchange
Difference -Equity, Equity Future and commodity Market

Points of difference Equity Equity Derivative Commodity Future

Underlying Stocks Stocks ,Index , Indices Commodity

Delivery Compulsory No delivery Optional

10 am – 11:30 pm MCX
Trade time 9:15 am- 3:30 pm 9:15 am- 3:30 pm
10 am – 5:00 pm NCDEX

No direct linkage of
Global market No direct linkage of stocks
individual stocks Direct Linkage
linkage

Only a speculative
Cannot be physically
Physical presence contract Can be Consumed
touch, seen

Dividend Yes Yes No

Trading + Demat
Account Trading + Demat Trading Acc.
 Features Description
Intraday and positional trade
Trade Type

Limit On an intraday trade 2 to 5 times on initial deposit

MCX – 4 to 8 % of FTV
Margin
NCDEX – 6 to 10 % of FTV

Brokerage 0.01% - 0.03 % intraday and positional trade

Clearing and settlement T+ 1 working days

Contact cycle As per decided by exchange

Expiry As per decided by exchange

BTST / STBT Possible

Roll Over Allowed

MCX – 3 % max. 9% on previous day closing price

Circuit Breaker
Types of traders
• Speculators: Those traders who trade only in MCX, NCDEX segments
and don’t have any exposure to the physical markets/ mandis, the only
objective is to speculate and earn from the momentum.

• Physical Traders: Farmers, Producers, Gold smiths, Exporter, Importer

and all those who use the physical commodity either for consumption
or business purposes, they either trade for hedging, arbitrage of for
taking physical delivery via exchanges.
Contract specification for MCX commodities
Commodity Price Quotation Lot Size Tick Size in Rs Mini Lot

Gold 10 gms 1 Kg (100) 1 100 gms

Silver Per kg 30 kgs 1 5 kg

Crude Oil Per barrel 100 bbl 1 10 bbl

Natural Gas Per mmbtu 1250 mmbtu .10 NA

Zinc Per kg 5000 kg .05 1000 kg

Per kg 5000 kg .05 1000 kg

Aluminum

Per kg 5000 kg .05 1000 kg

Lead

Per kg 1000 kg .05 250 kg

Copper

Per kg 250 kg .10 100 kg

Nickle
Factors affecting MCX Commodity prices
• Global prices
• Global Economic conditions
• US/ UK Economic data's /Global Stocks
• International events
• OPEC decisions

Off-line Trading : Along with the normal FMC regulated trading on MCX
and NCDEX, there are several Off-line traders, wherein an unauthorized broker
registers the trade on paper and does not issue a contract note for the trade , all
the monetary transactions are done in cash mode, open limit and weekly payoff
settlement. There is currently only Future contracts in Commodity Derivatives
in India and no options contract for commodity trading.

Crude oil is of 2 types :

-Brent Crude oil (quantity of Sulphur is more )
- Sweet Crude oil (quantity of Sulphur is less)
Need of Commodity Trading
• Hedging tool for producers/farmers
• Speculative instrument
• Investment opportunity in Precious metals
• Arbitrage opportunity between Domestic and Foreign commodity markets

Important Data
• Crude oil inventory is declared every Wednesday
• Natural Gas inventory every Thursday
• LME every day around 1:30 PM
• Unemployment claim

Circuit Breaker :The base price limit will be 3%. Whenever the base daily price
limit is breached, the relaxation will be allowed upto 6% without any cooling off
period in the trade.In case the daily price limit of 6% is also breached , then after a
cooling off period of 15 mins.the daily price limit will be relaxed upto 9%
 Day 11
In case price movements in international markets is more than the
maximum daily price limit (currently 9%), the same may be further
relaxed in steps of 3% beyond the maximum permitted limit and inform
the Commission immediately.

DDR – Due date rate is calculated on the expiry day of the contract. This
is calculated by way of taking simple average of last 3 days spot market
price.
 THANK YOU

WealthChaser Global Research