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Sterlite Industries (I) Ltd STER

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Steel Authority Of India Ltd. SAIL
Tata Steel Ltd. TATASTEEL
Hindustan Zinc Limited HINDZINC

How to Use Futures Trading Strategies

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Before making any investments, no matter what the investment vehicle, a person s
hould know the market and understand how to use certain trading strategies to po
ssibly turn a profit. Futures' trading is no exception, and a person should use
caution when trading. There are certain trading strategies that have proven them
selves over the long-term, but an investor still must understand the underlying
investment and not just the strategy.
Step 1
Go long on a futures contract. Going long is just trading verbiage for buying a
futures contract and then holding it on the expectation that the price will rise
. Then, you can sell the future at a profit.
Step 2
Trade futures contracts on margin. This is where you borrow the money from a tra
ding company and then use that money or credit to buy futures contracts. General
ly, the trading will require that you deposit a percentage of the margin to secu
re the loan. The percentage by law has to be 50% or more. This is risky because
the company can call the margin at anytime they choose, and you will be responsi
ble for any deficit in trading price no matter the amount.
Step 3
Use a spread strategy to trade futures contracts. This is where a trader can buy
and sell futures contracts for the same commodity. For example, say there is a
-05 price difference in the futures of pork belly contracts from one month to th
e next month. You expect the price to rise. You would then sell the current mont
h's contract and buy the next months contract given that this expected rise in p
rice makes the latter contract more profitable.
Step 4
Utilize a butterfly-spread futures-trading strategy. In this example, you would
buy a first-of-the-month contract, sell two middle-of-the-month contract and the
n buy an end-of-the-month futures contract.
So what exactly is a Future?
A Future is nothing but a derivative contract like an option. Both options and f
utures are basically nothing but derivatives in India. To know the present and f
uture of Futures we have to chiefly know what they are. True to its name, a future
is a financial contract asserting the sale of stocks or physical commodities fo
r future delivery. Alike options , a future contract tries to bet on what would be th
e price of a certain commodity in the future market. The future market is an ide
al place for potential buyers and sellers to meet and enter into future contract
s. Futures pricing can be either based on an open cry system or electronically m
atched bids and offers. As aforementioned, and as can be made out, this contract
is one of speculation. Hence apart form future buyers and sellers; investment s
peculators also are an integral part of this mode of investment.
Options on future contracts limits losses while maintaining the possibility of y
ielding good profits. Please note that options on futures are parallel to that o
f insurance policies. The buyer pays a premium in return of the right to buy or
sell, as the case may be, within a time period at a predetermined price known as
strike or exercise price. Margin in the future contract implies the starting de
posit made into an account for entering the futures market. The initial margin (
starting margin) is the minimum amount required to enter the futures market whil
e the maintenance margin is the lowest amount possible to be reached before repl
enishing the account. Upon liquidation of the contract, you would receive the pr
incipal amount plus or minus any gains or losses as the case may be. Hence the a
mount in the margin account changes as per the market. The futures exchange, usu
ally at 5-10% of the futures contract, determines the minimum level margin.
However, we would like to mention here that the futures market is highly risky a
nd not advisable to venture into it if you are a new investor. The initial margi
ns are significantly smaller as contrasted with the contract s cash value. Hence t
he futures positions are considered highly leveraged. The smaller the value of t
he margin in comparison to the cash value of the futures contract, the higher th
e leverage. However, the futures market is also a place for people to reduce ris
k as price is pre-set and therefore when making a purchase or selling it is less
likely to be affected by various unpredictable circumstances.

Development of derivatives market in India

The first step towards introduction of derivatives trading in India was the prom
ulgation of
the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition o
n
options in securities. The market for derivatives, however, did not take off, as
there was no
regulatory framework to govern trading of derivatives. SEBI set up a 24 member
committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop
appropriate regulatory framework for derivatives trading in India. The committee
submitted
its report on March 17, 1998 prescribing necessary pre conditions for introduction
of
derivatives trading in India. The committee recommended that derivatives should
be
declared as securities so that regulatory framework applicable to trading of securi
ties
could also govern trading of securities. SEBI also set up a group in June 1998 u
nder the
Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in
derivatives market in India. The report, which was submitted in October 1998, wo
rked out
the operational details of margining system, methodology for charging initial ma
rgins,
broker net worth, deposit requirement and real time monitoring requirements.
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
include derivatives within the ambit of securities and the regulatory framework wa
s
developed for governing derivatives trading. The act also made it clear that der
ivatives
shall be legal and valid only if such contracts are traded on a recognized stock
exchange,
thus precluding OTC derivatives. The government also rescinded in March 2000, th
e three
decade old notification, which prohibited forward trading in securities.
Low Startup Costs only your computer
Low Overhead work from home
No permits or licenses no regulators
No set hours trade when you want
No employees no payroll, no forms, no hassle
No selling no products or services
No inventory no stock, inventory, no theft
No advertising who needs it?
No steep learning curves use our newsletter services
No worries about market direction profit short or long anytime
No individual stock shocks general market sentiment
No interest charges you put up margin first
Low transaction fees 0.10% of the contract value
No Real Estate - no tenants
No restrictions on markets to trade
No restrictions on time frames to trade
Inflation and recession proof
Total freedom to make all your own choices without someone looking over your sho
ulder or second guessing your every move