Terms and conditions
F & O
The amount of margin is small relative to the value of the derivatives contract so the transaction are leveraged or geared. Derivatives trading, which is conducted with a relatively small amount of margin, provides the possibility of great profit or loss in comparison with the principal investment amount. But transaction in derivatives carries a high degree of risk. You should therefore completely understand the following statements before actually trading in derivatives trading and also trade with caution while taking into account ones circumstances, financial resources, etc. if the prices move against you, you may lose a part of or whole margin equivalent to the principal investment amount in a relatively short period of time. Moreover, the loss may exceed the original margin account.
A. Futures trading involves daily settlement fall positions .Every day the open positions are marked to market based on the closing level of the index. If the index has moved against you, you will be required to deposit the amount of loss resulting from such movement. This margin will have to be paid within a stipulated time frame, generally before commencement of trading next day.
B. If you fail to deposit the additional margin by the deadline or if an outstanding debt occurs in your account, the broker/ member may liquidate a part of or the whole position or substitute securities. In this case, you will be liable for any losses incurred due to such close –outs.
C. Under certain market conditions, an investor may find it difficult or impossible to execute transaction, for ex, this situation can occur due to factors such as illiquidity i.e. when there are insufficient bids or offers or suspension of trading due to price limit or circuit breakers etc.
D. In order to maintain market stability, the following steps may be adopted: changes in the margin rate, increases in the cash margin rate or others. These new measures may also be applied to the existing open interest. In such conditions, you will be required to put up additional margins or reduce your positions.
E. You must ask your broker to provide the full details of the derivatives contracts you plan to trade i.e. the contract specifications and the associated obligations.
Risk of option holders
1. An option holder runs the risk of losing the entire amount paid for the option in a relatively short period of time. This risk reflects the nature of an option as a wasting asset which becomes worthless when it expires. An option holder who neither sells his option in the secondary market nor exercise it prior to its expiration will necessary lose his entire investment in the option. If the price of underlying does not change in the anticipated direction before the option expires to an extent sufficient to cover the cost of the option, the investor may lose all or a significant part of his investment in the option.
2. The exchange may impose exercise restrictions and have absolute authority to Restrict the exercise of options at certain times in specified circumstances.
Risk of Option Writers
1. If the price movement of the underlying is not in the anticipated direction, the option writer runs the risks of losing substantial amount.
2. The risk of being an option writer may be reduced by the purchase of other option on the same underlying interest and thereby assuming a spread position or by accruing other types of heading position in the option markets or other markets. However, even where the writer has assumed a spread or other by hedging position, the risk may still be significant. A spread position is not necessary less risky than a simple ‘long’ or ‘short’ position.
3. Transaction that involve buying and writing multiple options in combination, or buying writing options in combination with buying or selling short the underlying interest, present additional risks to investors. Combination transaction, such as option spreads, is more complex than buy or writing a single option. And it should be further noted that, as in any area of investing, a complexity not well understood is, in itself, a risk factor. While this is not to suggest that combination strategies should not be considered, it is advisable, is the case with all investment in options, to consult with someone who is experienced and knowledge with respect to the risk and potential rewards of combination transaction under various market circumstances.