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A Futures Contract is an agreement between a buyer and a seller to buy / sell a security in future (on the Expiry Day) at an agreed price. In case of a listed security, the agreed price is the traded price in a stock exchange (Exchange). Can the buyer / seller extinguish his side of the contract before the Expiry Day? Yes, he can by liquidating his position, fully or partially, in the Exchange.

Expiry Day is the last day of the Settlement Period. On this day, all outstanding contracts (except the Indices Contracts, or the options contracts where the Contract Value has become zero) of that Settlement Period are settled through delivery. (Seller to give delivery, while Buyer to take delivery at the agreed price.) In case of Indian Equity Derivative markets, the Expiry Day for the most Instruments is the last Thursday of the month. Settlement Period therefore usually starts from the last Friday of the month and ends with last Thursday of the next month. For example, if last Thursday of the month is on 27 th January, then the Expiry Day would be on 27th January and the next Settlement Period would start on 28 th January. However, if the last Thursday is on 31 st January, then the next Settlement Period would start on 1st February.

Unlike in the equity market, trading in equity derivative markets takes place in Lots. Lot size of a security is the minimum quantity in which the security can be traded. For example, if the lot size of Reliance is 250, it means the Futures and Options contracts of Reliance can be traded only in the multiples of 250. Lot Size multiplied by the price gives us the Contract Value. Lot size multiplied by the Marked to Market (MTM) gives us the Profit / Loss Per Lot.

Margin is the amount which a buyer or a seller in a contract has to keep with the Exchange before executing a Futures Contract. The Margin is specified as a percentage of the contract Value. The margin percentages are changed daily or even intra-day. For example, Lot size of Reliance is 250 Price of reliance Rs. 2000 Therefore, the Contract Value = Rs. 5,00,000 Margin % =20% Margin on one contract of Reliance = Rs. 1,00,000.

Simply stated, Open Interest is the number of outstanding contracts in Futures or in Options multiplied by its Lot Size. Every Instrument in Futures has Open Interest. Similarly, every Strike Price for an Option Contract has Open Interest. Open Interest would undergo change as under: - Existing buyer sells to a new Buyer, Open Interest would not change. Existing buyer sells to an existing seller, Open Interest would REDUCE. New Buyer buys from a new seller, Open interest would INCREASE. Change in Open Interest is a significant indicator of likely price movement in the stock. Generally speaking, an increase in price with increase in Open Interest would mean the stock is bullish. Increase in price with decrease in Open Interest would mean profit booking in long positions, or unwinding of short positions. Decrease in price with increase in Open Interest would mean the stock is bearish. Decrease in price with decrease in Open Interest would mean profit booking in short positions, or unwinding of long positions.

An Option gives right to the option holder to buy or sell a stock at an agreed price. If you are bullish on a stock, you would pay premium to buy a Call Option. If you are bearish on a stock, you would pay premium to buy a put option. In case of an Option contract, your loss is limited to the extent of premium paid. But you gains are unlimited. To facilitate smooth trading in options, each security has multiple Strike Prices. For example, Nifty current Value is 17800. It would have Strike Prices from 12000 to 20000 (or even beyond) for Calls and Puts. If you are bullish on Nifty, you can buy 17700 Call (called In the Money Call), or 17800 Call (called At the Money Call) or 17900 Call (called Out of the Money Call). Of course, other Strike prices such as, 17750, 17850, 18000, 18100 and so on, are also available. Buying higher Strike Prices for Calls would mean lower outgo of premium, but with lower probability of earning profit, and vice versa.

Options writing is the reverse of Options buying. The Options Writer sells a Call or a Put and pockets the premium. His gains are limited to the extent of premium collected, but his losses are limited. Needless to state, Options writing carries high degree of risk and should be undertaken after thorough study and of course with strict stop loss.

Multiple Options Strategies can be devised (examples below are for Nifty):- Naked Call or Put :- Buy 15800 Call (Higher Calls if you are not very sure) or 15800 Put (lower Put if you are not very sure).

Buy 17800 Call Sell 18000 Call. Your gains and losses are limited.

Sell 17800 Call Buy 18000 Call. By Selling 17800 Call you pocket the premium but expose yourself to unlimited losses. But buying 18000 Call serves the purpose of putting cap on your losses.

Buy 17800 Call and 17800 Put. You pay premium on Call as well as Put. This strategy is extremely useful, when an important event is round the corner, or when you expect significant movement in Nifty on either side. This strategy is also useful in case of high beta stocks which are slated to declare their results.

Sell 17800 Call and Sell 17800 Put You employ this strategy, if you expect Nifty to be range-bound. This strategy can be gainfully employed in the Weekly Expiries of Indices, when the market is expected to be range-bound.