|Bullish||Buy futures||Rs.35000/-||Profits increase as index rises (and vice versa)|
|Buy call options||Rs.10000/-||Substantial profits if index rises (loss limited to inv. amt.)|
|Write put options||Rs.35000/-||Profits limited to premium (risk of substantial losses)|
|Bearish||Sell futures||Rs.35000/-||Profits increase as index falls (and vice versa)|
|Buy put options||Rs.10000/-||Substantial profits if index falls (loss limited to inv. amt.)|
|Write call options||Rs.35000/-||Profits limited to premium (risk of substantial losses)|
Time decay in options: If index remains unchanged, the option premium will decrease and become nil on expiry. Here, the option buyer has lost his money and the option writer has profited.
Is there any catch?
Nifty futures and options being derivatives, have an expiry period (the last Thursday of every month). You cannot take “delivery” and hold positions indefinitely the way one can do with stocks.
You can however exit a position any time you feel like…same day, same week, etc. So you can daytrade or carry forward positions till expiry date.
With stocks, you can take delivery and hold positions indefinitely. Very often, this is how traders become investors and short term investors become long term investors!
Futures trading is a leveraged transaction. In case of Nifty, every 1% change leads to 8% change in your profit (or loss). So while you can earn fantastic profits, you can also lose money.
Options trading is tricky. For buyers, investment is less and profits unlimited. But the real profit depends on the option bought, days left to expiry, implied volatility and how fast the underlying moves. The time decay can knock off your entire investment. But if you follow the trend and always buy in-the-money options, then you need not worry. Most retail investors lose money because (a) they trade against the trend and (b) they have absolutely no idea about option pricing.
One can earn 100% or sometimes even 200% return in a month (buying option). On the other hand, a wrong trade can reduce capital.
Transaction costs (brokerage) is not an issue as we are not looking at intraday trades. Since positions are carried forward for many days, this really does not matter.
Rangebound markets are a problem as technically there is no way to predetermine this situation. Unfortunately there is no solution here and one has to live with this. Fortunately nifty seldom trades in a range.
Summary: Irrespective of what you trade in – stocks, futures or options, you will earn money only if you follow the trend. If you trade against the trend, you are almost sure to lose money. So the problem is not with the instrument but with the trading style.