Equity and Index Derivative
Equity derivative contracts are the class of derivatives whose value is derived from one or more underlying equity securities. Similarly we have Index derivative contracts which derive from the Indexes like Nifty , Bank Nifty etc. Options and futures are the most common equity derivatives. We will see what are options and futures in detail.
Futures are derivative contracts of an underlying asset or Index with a standardized lot size having an expiry date. Exchanges decide the lot size and they revise the number of units periodically. For example the the no of units in a single lot of Nifty Index futures is 75. It was started with 25, then updated to 50 and now while writing this article it is 75. All contracts have a specific expiry date and beyond that trading is not allowed on Exchanges and the contracts become invalid.
If you are holding the contract on the expiry date , brokers automatically square off your positions. If market participants anticipate an increase in the price of an underlying asset in the future, they could potentially gain by purchasing the asset in a futures contract and selling it later at a higher price on the spot market or profiting from the favorable price difference through cash settlement.
Similarly like futures options are also derivative instrument traded over exchanges. Unlike futures, options have a strike price. There are two types of options available Call option and Put Options. Options are versatile instrument which help the traders to construct different profitable strategies like Iron condor, Strangle, Straddle etc.
In India most traded derivative contract is Nifty Index. You can check my profitable trading strategies to improve your trading skills.
Hope this article helped you to understand equity and index derivatives better. Let us know your queries and suggestions in the form of your comments.