Equity Derivatives
Equity Derivatives cover futures and options on indices and single stocks. The exam tests contract mechanics, margins, settlement and the rights-versus-obligations distinction.
Core rules
- NSE launched index futures in 2000; index options and stock derivatives followed.
- A futures contract creates a bilateral obligation; an option buyer has a right, not an obligation, and pays a premium.
- Index options in India are European: exercise only at expiry. Stock options are American.
- Contracts trade in lots; profit or loss = price change × lot size.
- Margins include initial margin (SPAN) and mark-to-market; MTM is settled daily.
- Index derivatives are cash-settled; stock derivatives are physically settled.
- Position limits apply at client, trading member and market level.
Worked example
You buy one Nifty futures contract at 22,000 with lot size 25 and sell at 22,200. Price gain = 200 points; P&L = 200 × 25 = ₹5,000. If initial margin was ₹1,50,000, the return on margin is 5,000 ÷ 1,50,000 = 3.33% before costs. The reasoning: the lot multiplier converts index points into rupees; leverage is why margin return differs from index return.
Traps that cost marks
- Confusing option premium with margin; premium is the price paid, margin is collateral.
- Forgetting the lot multiplier and reporting only point gain.
- Assuming index options can be exercised any day before expiry.
- Ignoring daily MTM outflows that can force early exits.