Which is Best Nifty Futures or Nifty Options

Long Term Investments

Long-term investments are those held for one year or more, aiming to generate additional income for an organization or achieve significant objectives. Online share trading refers to the process where traders and investors electronically buy and sell securities, usually through a brokerage firm.

Nifty Options

Nifty Options are contracts that give the investors the right to trade (buy or sell) the Nifty options at a predetermined price (strike price) and within a certain date (specified timeframe) but not the obligation.

It means that there is no compulsion for the trader to trade the asset but the trader must pay the price of the premium for not being able to complete the contract in case Nifty share price moves against the expectations. In this way, an investor is safeguarded from adverse market conditions.

The Nifty option share price is called strike price and the Nifty Options lot size is 50.

Nifty options are highly adaptable and help a trader in adjusting and adapting his position to any market conditions.

Contract Specifications for Nifty Options

NSE introduced Nifty Options on June 4th ,2001

Trading Cycle - Nifty 50 index options include 4 weekly expiry contracts, 3 consecutive monthly contracts, 3 quarterly contracts (March, June, September, December), and 8 semi-annual contracts (June, December), ensuring options with a minimum 5-year tenure. New weekly options are introduced after each week's contract expires, and upon the near month contract expiry, new contracts are introduced with new strike prices for both call and put options.

Expiry Day - Nifty 50 monthly options expire on the last Thursday of the month, while weekly options expire every Thursday of the week. If last Thursday is a trading holiday, contracts expire on the preceding trading day.

Strike Price - The quantity of contracts offered in index options depends on the range of the preceding day's closing value of the underlying index. It is determined according to the table below for both weekly and monthly contracts: Nifty Index Level - All Levels, Strike Interval - 50, and the number of strikes in the money, at the money, and out of the money, set at 30-1-30.

Lot & Contract Size – Nifty Options Lot size is 50. The value of the futures contracts on Nifty 50 may not be less than Rs. 5 lakhs at the time of introduction.

Order Type - Various order types like regular lot, stop loss, immediate or cancel, and spread orders offer diverse trading strategies and flexibility in the financial markets.

Why should we Invest in Nifty Options?

As said earlier, Nifty options are highly adaptable to different Nifty market conditions. Hence, it has a great potential to generate additional investment income. Also, Nifty options offer various trading strategies like buying calls/ puts. Spreads, straddles etc. which gains profits from different market conditions.

Risk in Nifty options trading is limited to the premium paid for the Nifty Option contract, which is advantageous for risk averse traders.

Nifty options safeguards investors against fluctuating market prices like decline in Nifty share prices.

Nifty Options provide greater profits on current and new investments.

Nifty options allow the purchase of Nifty stocks at lower prices.

Even without owning the nifty stocks, investors can benefit from the rise or fall in Nifty share prices.

Nifty options can be used in combination with other option contracts and other nifty instruments for wealth creation and for safeguarding investments due to their special risk/ reward structure. The maximum amount an investor loses in options trading is only the premium.

In Nifty Options, investors can fix a price for a certain period for a premium price, which is a percentage of what the investor has to pay if he owned the stock outright.

Nifty Options has a time decay element which can work in favour of Nifty Option sellers.

Risks Involved in Nifty Options Trading

It is possible only to make a limited profit with Nifty Options when compared to Nifty Futures where traders can take large positions.

Nifty Options trading is better suited for experienced and learned traders who can understand the market trends and complexities in trading strategies.

How Profit is Made in Nifty Options?

Taking the obligation to cancel the trade at times of adverse conditions.

Exercising the option contract at times of favourable market conditions.

Waiting till the end of contract and making the price difference as profit.

Nifty Futures

Nifty Futures are standardized contracts where the two parties agree to transact (buy or sell) on S&P CNX Nifty index at a predetermined price for future delivery.

It means that the Nifty Future will complete the contract by keeping the buyer under the obligation to buy the asset and seller under the obligation to sell the assets and fulfil the terms of the contract within a predetermined time period.

There is no upfront cost involved in the Nifty Futures Contract.

Nifty Future is a type of derivative instrument, which is used for hedging, speculation and arbitrage. 

Contract Specifications – Nifty Futures

NSE started trading in Nifty Futures on June 12th, 2000.

Trading Cycle - Nifty 50 futures follow a 3-month trading cycle: the near month (1), the next month (2), and the far month (3). A new contract starts the day after the near month contract expires, lasting for three months. This ensures three contracts are always available for trading: near month, mid-month, and far month.

Expiry Day - Nifty 50 futures contracts expire on the last Thursday of the expiry month. In case the last Thursday is a trading holiday, the contracts expire on the preceding trading day.

Lot & Contract Size – Lot size of Nifty Futures is 50. The value of the futures contracts on Nifty 50 may not be less than Rs. 5 lakhs at the time of introduction.

Order Type - Various order types like regular lot, stop loss, immediate or cancel, and spread orders offer diverse trading strategies and flexibility in the financial markets.

Why Should We Invest in Nifty Futures?

Nifty Futures are highly liquid instruments which can be easily cashed at times of needs.

Nifty Futures can be used to make considerable returns by using only margin money.

Continuous monitoring of Nifty index stocks is not required since market trend tracking is easier and understandable. A trader can take a long position when an uptrend is expected and take a short position when downtrend is anticipated.

Traders can easily trade large positions with relatively small capital.

Risks Involved in Nifty Futures Trading

When the market condition is not favourable, Nifty Futures face the risk of unlimited losses.

Nifty Futures do not have a time decay which can be disadvantageous for certain trading strategies.

How Profit is Made in Nifty Futures?

On a daily 'Market to Market' basis, the sum is allocated to the futures accounts of the two parties at the conclusion of each trading day. Profits can also be achieved by assuming the opposing position.

Considerations for Choosing:

Options vs Futures Which is better? Let's analyze.

1. If you hold a strong directional view on the market:

• Futures may be suitable.

• Options provide flexibility for various market scenarios.

2. If you prioritize limited risk:

• Options might be more appropriate.

• Futures offer higher leverage but come with unlimited risk.

3. Considering different market conditions:

• Options offer a wide range of strategies.

• Having a specific strategy in mind may influence your choice.

4. For beginners:

• Options trading might be perceived as complex.

• Futures trading may be more straightforward; understanding the chosen instrument is crucial.

5. Position size and associated risk:

• Options typically involve a smaller underlying position, reducing risk.

• Futures contracts with larger underlying positions introduce more risk and uncertainty.

6. Nifty options or futures trading:

• Gains or losses depend on market observations.

• Unwavering confidence in a market direction may yield higher profits.

7. Lot size consistency:

• The current lot size for both Nifty futures and options is 50, with uniform adjustments to the Nifty lot size.

8. Market movements:

• Futures exhibit rapid movements, mirroring Nifty points.

• Options move gradually, influenced by the strike price.

9. Risk consideration:

• Understanding the willingness to take risks makes options a valuable tool.

10. Risk in trading:

• Engaging in futures trading involves unlimited risk, with potential total losses.

• Purchasing options presents a limited risk scenario, reflected in the premium paid.

Conclusion

There is no one-size-fits-all answer. Both Nifty Futures and Nifty Options have their advantages and disadvantages. It's essential to align your choice with your trading goals, risk tolerance, and market analysis. Additionally, consider seeking advice from financial professionals before engaging in derivatives trading.

Frequently Asked Questions

Difference Between Nifty and Nifty Futures?

Nifty is the NSE's benchmark stock market index, representing the performance of the top 50 companies listed on the National Stock Exchange of India. Nifty Futures, on the other hand, are standardized contracts to buy or sell the Nifty 50 index at a predetermined price and date in the future, providing a derivative instrument for trading based on Nifty's anticipated future value. While Nifty reflects the current market value, Nifty Futures allow investors to speculate on or hedge against future movements in the index.

How To Buy Bank Nifty for Long Term?

To buy Bank Nifty for the long term, open a Demat account, research and choose a financial institution with growth potential within the Bank Nifty index. Place a buy order for Bank Nifty shares through Enrich Money, considering factors like financial health, performance, and long-term growth prospects of the selected bank. Regularly monitor your investment and stay informed about market and economic conditions affecting the banking sector.

How To Deal in Nifty Futures?

To trade in Nifty Futures, open a trading account, deposit the required margin, and place buy or sell orders through the Enrich Money based on your market outlook. Monitor the market, set stop-loss orders to manage risks, and consider factors like market trends and economic indicators for informed decision-making. Keep in mind that futures trading involves leverage and potential for significant gains or losses.

How does the lot size impact long-term investment decisions between Nifty Futures and Nifty Options?

Consider the lot size as it influences the capital required. Options typically involve a smaller underlying position, reducing risk compared to futures with larger underlying positions.

Should beginners opt for Nifty Futures or Nifty Options for long-term investments?

Beginners might find Nifty Futures more straightforward but should carefully understand the instrument. Options, while potentially complex, offer risk management benefits suitable for beginners with a specific strategy in mind.