Futures Vs Options (Derivative Trading)

Derivative Trading is meant for Hedging. Initially, traders and investors used to buy / sell options and futures as an Hedging instrument for positions taken in Equity. In other words, Options and Futures are used as an insurance for the equity purchase and few used this as an monthly rental income by selling OTM options 

Now-a-days traders don't use derivatives as an hedging instrument, instead they trade daily, weekly and monthly for instant gratification. Let's see which mode of derivative holds best for trading. As an investor, this should only be considered for hedging purpose. For analysis, let us take the example of Aarti Industries. The current market price of the stock is around 911.50. This stock was trading around this average price for around 6 months

Let's take this calculation for the next expiry on 28th October 2021:

Options Trading

For October 2021 expiry, Option selling on OTM strike 900 PE was trading at a premium of Rs.35.50

Hedging on OTM strike 860 PE was trading at Rs.20.00 

The difference in Premium is Rs.15.50

Margin required per lot is Rs.59,000.00

For 6 sets, the premium collected is Rs.15.50 * 6 = Rs.93.00

Option premium collected is Rs.15.50*5100 = Rs.79,050.00

The Margin amount / investment for this trade = Rs.3,50,000 (Approximately), on which we would have collected the premium and the exact net amount invested would be Rs.2,70,950.00

Above position means, even if the stock fell by 1.25% to 900 by October 2021 expiry, the collected entire premium is ours. The winning chance of this is much higher provided the stock does not fall very badly beyond 890.00

Futures Trading

Current Market price (CMP) of Aarti Industries is 911.50

Future price for October 2021 expiry is trading at 912.80

Buying 2 lots (1700 shares) in future for October 2021 expiry would cost Rs.3,50,000 as margin amount. Let's say if we need to collect the profit of Rs.80,000 as we did in Option selling, the stock should rise by 47.00 points (5.00%). Which means the stock should go to 960.00 to get that profit

If the stock decline by 1.25% and went to 900 during the close, then it would be a loss of Rs.21,760.00

So, it is always better to be on the Option selling with hedge compared to futures buying. In Options we are backed by a hedge but in futures we are doing a naked buying

Hope you got some additional information on comparing Options and Futures trading for a capital of Rs.3,50,000 on the stock Aarti Industries. You can compare this for all the stocks which are traded on derivative and come to a conclusion on taking a position

As an investor, derivative trading should be considered as an hedge for positions bought in Equities.

Disclaimer: The above blog is for an Educational / Informational purpose not a trading advice. Consult your financial advisor before investing.

Have a Great Day

B G Nareshkumar