Futures and options segment meaning
However, do not rely on one indicator, rather look at them in relation to each other A lot of information is disseminated on stock and index derivatives by stock exchanges daily. A good amount of information is also available on the websites of stock exchanges. This information is made available through various channels including bhav copy and daily market activity report.
Investors can look at various parameters and ratios to gauge the mood futures and options segment meaning the market and determine in the investment strategy. A note of caution: Liquidity is necessary for better futures and options segment meaning discovery.
A few stocks go without trading for many days. Around stocks are traded regularly in the futures segment. Of the stocks eligible for the derivatives trading, less than stocks are traded regularly in the options segment. The top 10 stocks account for over one-third of trading in the options market. Stock futures are more liquid than stock options.
Premium or discount to the cash market: First, inspect if the stocks or indices are trading at a premium or discount in the derivatives market compared with their underlying to predict whether the market mood is bullish, bearish or indecisive. Suppose stock futures or index futures are trading at a premium compared with the underlying stock or index.
This points to a bullish trend in the cash market. But a stock or an index trading at a discount in the futures market indicates a bearish market. Investors can also look at the quantum of premium or discount to understand the magnitude of the bullishness or bearishness. If a particular index is trading continuously at a premium, it would indicate buoyant market sentiments. However, if the premium turns negative discount to the underlying stock or index, it would mean the stock or the market is weakening or likely to weaken in future.
Of late, select real-estate and banking stocks have started trading at a discount in the futures market compared with the cash market. This can be attributed to the overall negative sentiments towards the real-estate industry on account of tight liquidity situation, slowing down of the economy, and falling real-estate prices. This ratio is also known as the put-call volume ratio. It is widely used to understand the sentiments prevailing in the cash market.
The put-call ratio is futures and options segment meaning by dividing the daily or weekly traded volume of put options by the daily or weekly traded volume of call options. This ratio is not only easy to calculate but also simple to interpret. Higher the number of call options traded higher are the chances of the market turning bullish in future.
If put options are more popular, bears could dominate the market. An increasing ratio over a period of time means investors are putting more money in put options, implying the broad market outlook is bearish.
Thus, the market can be expected to move south or witness a sell-off. This could also be the case of investors trying to hedge their portfolios. On the other hand, a declining put-call ratio indicates investors are showing more interest in buying call options and futures and options segment meaning market is likely to move up in the near future.
Interestingly, extreme values point to a trend reversal in the coming days. This can also be termed as a contrarian indicator. An increase in the ratio to unjustifiably high levels is considered a buying opportunity as traders start covering their short positions. On the contrary, too many call futures and options segment meaning or a low put-call volume ratio signifies the market has reached an overbought level and a correction is likely. In short, a very high put-call ratio indicates the bear phase is likely to end, while a very low ratio means bulls could lose the grip over the market and a market correction is likely.
The put-call open-interest ratio is also one of the key indicators of possible futures movement in the spot market. The put-call open-interest ratio is calculated by dividing the total open interest of put options by the total open interest of call options. For instance, if the open interest for put options is nine and the same figure for the call options is 10, the put-call open-interest ratio would be 0. A put-call open-interest ratio of more than one means put options have a higher open interest compared with the call options and, thus, the future price trend is likely to be bearish.
A low put-call open-interest ratio means bullish sentiments are likely to continue in future. Investors can monitor periodical changes in the put-call open-interest ratio to gauge future market outlook. The concept of cost of carry attempts to explain the relationship between the cash market price underlying and its price in the futures market.
It means expenses incurred while a position is being held, interest on securities bought on margin and storage cost less income earned on the asset. Suppose Reliance Industries is trading at Rs in the cash market. The formula is as follows. Cost of carry can be negative or positive. If the cost of carry is substantially positive or negative, it offers arbitrage opportunities for traders.
If the cost of carry is positive, traders can sell futures and buy the underlying in the futures and options segment meaning market to effect arbitrage. If the cost of carry is negative, traders can buy futures and sell the underlying to make riskless profit. The cost of carry ensures that the futures price stay in tune with the spot price. Now what does the cost futures and options segment meaning carry indicate about the future?
Generally, negative cost of carry indicates bearish sentiments, while positive cost of carry points to a bullish market undertone. At the same time, a very high negative cost of carry signifies building up of huge short positions on the counter. Any subsequent profit booking could lead to an downturn in futures and options segment meaning stock.
Though a higher positive cost of carry indicates futures and options segment meaning undertone, it could also lead to trend reversal once profit booking sets in. Futures and options segment meaning can find the cost of carry for stocks eligible for derivatives trading on the NSE website. Investors love a bullish market and perceive it safe as well.
On the contrary, futures and options segment meaning bearish market is considered risky. Therefore, increase in daily volatility is considered bearish, while lower or moderate volatility is taken as a sign of a bullish market. Daily volatility represents volatility of the future contracts on a particular underlying stock or index.
These figures are available on the NSE website. At the time of expiry or close to expiry, investors will find news articles discussing rollover. Rollover is applicable to future contracts and not options. If an investor is holding a position in futures, he will close his position in the near month or in the current month and take a fresh position in the next-month contract. Rollover helps investors to carry his position for a longer period of time.
Suppose an investor is long on, say, 10 contracts of Nifty futures in December. To roll over, he will have to sell these 10 contracts and simultaneously buy 10 contracts with expiry in January There is an indirect cost attached to it.
If the Nifty futures expiring in December are trading at 2, the investor will find the Nifty futures with expiry in January trading at a slight premium: Suppose, the Nifty futures and options segment meaning expiring in January are trading at 2, he will have to bear the difference: Further, the investor will have to bear transaction-related expenses such as brokerage.
The percentage of outstanding positions rolled over to the next month is used to gauge market sentiments. A higher percentage of rollover symbolises bullish undertone, while a lower rollover indicates bearishness. It is difficult to comment on the market mood by just looking at the rollover figures. Investors have to use other numbers to deduce the right conclusion. Every buy side has a sell side to it.
As a rule of thumb, if the market is in a bull phase, a high percentage of rollover could mean the market would remain firm or move up in the near future. In an extremely bearish market, a high rollover could spell trouble as it could denote that the bears are convinced the market would fall in the future. Open interest and change in open interest: It can also be defined as the number of contracts that are still to be closed or to be delivered at the end of the day.
It can be also termed as the number of 'buy' contracts that are still open. For instance, the open interest in Reliance Industries 1, with January expiry call option is, say, It means these many contracts still need to be closed.
Many investors get confused with open interest and volume of futures and options segment meaning and assume that both are same. However, volume of trade and open interest are different. Suppose, an investor buys contracts of Reliance Industries 1, call. Volume for futures and options segment meaning day will be If he sells 50 contracts next day to another investor Mr B, the volume will be 50, but open interest will remain the same at as these many contracts are still open: Now suppose Mr C bought 25 contracts from Mr D on the third day, volume will be 25 and open interest will be Open interest goes up as and when new positions are created.
Analysing open interest on a standalone basis could be misleading. Here, investors need to use information about open interest in conjunction with two other bits of information: Volatility is the prime factor that reflects risk. Volatility is defined as the rate and magnitude of changes in prices. VI measures the amount by which an underlying index is expected to fluctuate in the near term.
VI is based on the order book of the underlying index options and is calculated as annualised volatility denoted in percentage. From the best bid-ask prices of Nifty 50 options contracts, a futures and options segment meaning figure is calculated, indicating the expected market volatility over the next 30 calendar days. A new order Editorial.