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  • Best Oil Marketing Companies (OMCs) in India

    Best Oil Marketing Companies (OMCs) in India

    India is a developing economy and is also known as a consumption-oriented country. To fulfil the rising energy demand, OMCs play a vital role. They ensure the availability of fuel for both urban and rural sectors. Investment in OMCs provides you with an opportunity to participate in the country’s growth.

    In this blog, we will give you an overview of the best OMC companies in India, along with the benefits of investing in this sector.

    What are Oil Marketing Companies?

    Oil Marketing Companies (OMCs) are companies that are primarily engaged in the refining, distribution, and marketing of petroleum products such as petrol, diesel, kerosene, LPG (cooking gas), aviation turbine fuel (ATF), lubricants, and other petroleum derivatives.

    Their key activities include:

    • Refining crude oil into usable fuels and products.
    • Storing and transporting petroleum products across the country through pipelines, depots, and terminals.
    • Retail distribution via petrol pumps, LPG cylinders, aviation fuel stations, and bulk sales to industries.
    • Marketing and branding petroleum products to end consumers.

    In India, OMCs are a critical link between crude oil imports/refining and the final consumer. They ensure the availability of fuel for households, vehicles, industries, and airlines.

    S.No.Best Oil Marketing Companies in India
    1Bharat Petroleum Corporation Limited
    2Hindustan Petroleum Corporation Limited
    3Indian Oil Corporation Limited
    4Reliance Industries Limited

    Market Information of Oil Marketing Companies

    CompanyCurrent Market Price (in ₹)Market Capitalisation (in ₹ crore)52-Week High (in ₹)52-Week Low (in ₹)
    Reliance Industries Limited1,36818,51,106 1,551 1,115
    Indian Oil Corporation Limited1411,98,686 184111
    Bharat Petroleum Corporation Limited3181,37,813 376234
    Hindustan Petroleum Corporation Limited38782,411 457288
    (As of 3 September 2025)

    Read Also: List Of Best Oil and Gas Stocks in India

    Best Oil Marketing Companies in India – An Overview

    An overview of the best oil marketing companies in India is given below:

    1. Bharat Petroleum Corporation Limited

    BPCL was founded in 1952 as a joint venture between the Indian government and Burmah Shell. In 1976, the Indian government acquired Burmah Shell, converting BPCL into a fully owned government company. The company explores, refines, distributes, markets, and retails petroleum and petroleum-related products. The Ministry of Petroleum and Natural Gas of the Indian government is overseeing it. The headquarters of the company are situated in Mumbai.

    Know the Returns: 

    1Y Return (%)3Y Return (%)5Y Return (%)
    -11.34%97.98%53.25%
    (As of 3 September 2025)

    2. Hindustan Petroleum Corporation Limited

    HPCL was established in 1974 as a result of the merger of Esso Standard and Lube India Limited. The company became the first public sector enterprise to list on the Bombay Stock Exchange in 1992. The company achieved its profit of 10644 crore, and earned the title of Maharatna status. It operates through a network of more than 17,000 petrol pumps in India, out of which 40% are in urban areas and the remaining are located on highways and in rural areas. The company has its headquarters situated in Mumbai.

    Know the Returns: 

    1Y Return (%)3Y Return (%)5Y Return (%)
    -9.62%143.93%187.26%
    (As of 3 September 2025)

    3. Indian Oil Corporation Limited

    The Indian Oil Company was incorporated in 1959 in order to market petroleum products. Later in 1964, it merged with Indian Regiments Limited and formed Indian Oil Corporation Limited. During the 1970s and 80s, it was considered the largest refinery and marketing company in India. Later, the company diversified its business into petrochemicals, pipelines and started its overseas operations. It works under the Ministry of Petroleum and Natural Gas, and it was awarded the status of Maharatna Company. The company has its headquarters situated in New Delhi.

    Know the Returns: 

    1Y Return (%)3Y Return (%)5Y Return (%)
    -21.16%96.92%146.44%
    (As of 3 September 2025)

    4. Reliance Industries Limited

    Mr. Dhirubhai Ambani founded the company in 1966, and it became a publicly listed company in 1977. It began its expansion into the petrochemical industry later in 1980. After the death of founder Dhirubhai Ambani in 2002, Reliance was divided between his two sons. Mukesh Ambani continues to lead Reliance Industries Limited, which remains focused on petrochemicals, refining, retail, and telecom. However, the company’s core business is petrochemicals. The company is also making significant investments in the renewable energy sector. The company has its headquarters situated in Mumbai.

    Know the Returns: 

    1Y Return (%)3Y Return (%)5Y Return (%)
    -10.17%8.06%28.51%
    (As of 3 September 2025)

    Key Performance Indicators (KPIs)

    CompanyOperating Profit Margin (%)Net Profit Margin (%)ROE (%)ROCE (%)Debt to Equity
    Reliance Industries Limited13.508.378.258.700.41
    Indian Oil Corporation Limited2.991.587.298.220.76
    Bharat Petroleum Corporation Limited4.732.7216.3816.300.63
    Hindustan Petroleum Corporation Limited2.871.5713.1612.671.30
    (As of March 2025)

    Read Also: Indian Oil Case Study

    Benefits of Investing in Oil Marketing Companies

    The significant benefits of investing in oil marketing companies are as follows:

    • Consistent Demand: OMCs deal with important fuels such as petrol, diesel, etc., which are always in demand, no matter what the condition of the economy. Regular earning is made possible due to constant demand.
    • Government Incentives: OMC companies receive financial and policy support from the government, due to which their operational risk is reduced.
    • Dividend: Public sector oil marketing companies generally distribute their profit in the form of dividends, which can be a regular source of income for a conservative investor.

    Factors to be considered before investing in Oil Marketing Companies

    The following are the factors which need to be considered before investing in oil marketing companies:

    1. Volatility in Crude Oil Price: The raw material for OMCs is crude oil prices of which fluctuate due to various factors, including global economic factors, etc. A sudden rise in crude oil prices may impact the profit margin of these companies.
    2. Exchange Rate: Crude Oil is imported from different countries, the prices of which are to be paid in USD. A weak rupee can increase the input cost and reduce the profit margin of the company.
    3. Geopolitical Risk: The conflict among the countries of the Middle East and the decision by OPEC can affect the demand and supply of crude oil globally.

    Future of Oil Marketing Companies in India

    The government of India is importing more oil and gas to meet the country’s expanding energy needs. Due to the industry’s dependence on imports, a number of companies were looking into possibilities for investment. Since the demand for petroleum products has increased by 6.1% year over year, the demand for natural gas has increased by 6.4%. The government aims to raise the refining capacity to 450 million metric tonnes annually (MMTPA) by 2030. Therefore, India’s oil and gas industry has a bright future.

    Read Also: Best Cloud Computing Stocks in India

    Conclusion

    Investing in oil and gas companies offers an opportunity to participate in India’s economic growth, as energy demand continues to rise. However, the increasing adoption of electric vehicles worldwide presents a long-term challenge to the sector. To adapt, many OMCs are expanding into EV charging infrastructure and renewable energy. At the same time, investors should remain mindful of risks such as crude oil price volatility, currency fluctuations, and policy changes. Hence, it is always advisable to consult a qualified financial advisor before making any investment decision.

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    Frequently Asked Questions (FAQs)

    1. What are some OMC stocks listed in the Indian stock market?

      The companies like Reliance Industries Limited, Bharat Petroleum Corporation Limited, Hindustan Petroleum Corporation Limited, and Indian Oil Corporation Limited are engaged in the distribution and sale of oil and related products.

    2. What does the OMC sector refer to in the Stock Market?

      OMC or Oil Marketing Companies are known as those companies which are involved in refining, distributing, and marketing of petroleum products such as petrol, diesel, etc.

    3. What are the key risks included while investing in OMCs?

      The key risks while investing in OMCs are volatility in the crude oil price, exchange rate fluctuations, government policy changes, and shift toward electric vehicles.Q4. Does the government of India own all

    4. Does the government of India own all OMCs?

      Yes, except for Reliance Industries Limited, all the other OMCs, such as BPCL, HPCL, and IOCL, are owned by the government of India.

    5. Do public sector OMCs pay dividends?

      Yes, public sector OMCs like BPCL, IOC, and HPCL pay regular dividends to their investors. Hence, they are suitable for investors who are looking for regular income.

  • How to Buy NCDs in India?

    How to Buy NCDs in India?

    Investors in India are now looking for options that offer fixed returns, are safe and give better income than FDs and this is where NCDs or Non-Convertible Debentures have emerged as a strong option. Amidst rising interest rates and market volatility in 2025, NCDs are becoming a popular option among investors for a stable and reliable income.

    If you want to know what NCDs are, how they work, and how you can buy them online, then this guide is for you.

    What are NCDs?

    NCDs, or Non-Convertible Debentures, are debt instruments in which you lend money to a company for a fixed period in return for a fixed interest rate. This is a fixed income investment like a bank’s fixed deposit (FD), but the returns may be slightly higher.

    NCDs are called “non-convertible” because they cannot be converted into company shares in the future. That is, it is completely a loan which the company takes from you and returns the principal amount along with interest to you on the fixed date.

    Which companies issue NCDs?

    In India, NCDs are usually issued by large corporate companies and NBFCs (Non-Banking Financial Companies). When these entities need capital for business, they raise funds from common investors through NCDs instead of taking a loan from a bank. These issues are regulated by SEBI, which ensures transparency and fair process. However, repayment of interest and principal depends entirely on the issuing company. Every public NCD issue is preceded by an official document called a prospectus, which contains complete details of how much the company is borrowing, for how many years, at what interest rate and on what terms.

    How many types of NCDs are there?

    There are mainly two types of NCDs: Secured NCDs and Unsecured NCDs.

    • Secured NCDs : Secured NCDs are such debentures in which the company assures the investors that if it fails to pay the interest or principal on time, then the investors’ money will be paid by selling its assets. To understand it in simple language, there is some asset or guarantee of the company behind these NCDs.
    • Unsecured NCDs : In unsecured NCDs, the company does not give any guarantee that if it fails to pay the money, how will your money be safe. That is, there is no asset backup behind these debentures.

    If the company defaults on such NCDs, it may be difficult for investors to get the money. For this reason, the interest rate on these is often high so that the attractiveness remains in return for the risk.

    Why is a credit rating important?

    Every NCD is given a rating by a credit rating agency (like CRISIL, ICRA, CARE) which indicates how reliable the company is. A AAA rating is considered the safest, while BBB or lower ratings indicate higher risk. So, before investing in any NCD, make sure to check its rating – this will determine your returns and safety.

    Read Also: Non-Convertible Debenture (NCD) vs Fixed Deposit (FD): Meaning, Features, and Differences Explained

    Why Consider Buying NCDs?

    In an environment where the market is volatile and the interest rates of traditional investments like FDs have become limited, NCDs are becoming a stable and reliable source of income. If you want regular income and want to invest by keeping a little distance from risk, then NCD can be a better option. Know its features below:

    • Reliable income with fixed interest rate : NCDs give you a pre-determined interest rate, due to which the investment return is clear from day one and the return on investment is not affected by market volatility.
    • Better returns than FDs : Today many companies are offering interest up to 8% – 10%, which is much higher than the normal bank FD especially on long-term investments.
    • Regulatory security and transparency : Being regulated by SEBI, the process of NCDs is clear and secure, which gives additional confidence to investors.
    • Flexible interest payment options : You can choose to take interest every month, quarterly or lump sum on maturity as per your need.
    • Easy buying and selling on the exchange : If you have invested in a listed NCD, you can sell it on NSE or BSE if required thus ensuring liquidity.

    How to Buy NCD in India: Step-by-Step Process

    If you want to invest in NCDs, then read the easy steps given below carefully.

    Step 1: It is necessary to have an active demat account

    NCDs are credited to your demat account just like shares. If you do not have a demat account, you can easily open an account with a trusted platform like Pocketful. The entire process is digital and is completed in a few minutes.

    Step 2: Keep an eye on upcoming NCD issues

    Every month some companies issue new NCDs. You can see their information in the “Upcoming NCDs” section on NSE India, BSE India, SEBI website. From here you get the issue date, interest rate, and other important information in advance.

    Step 3: Analyze the NCD Issue

    Before investing in NCD, definitely see what is the credit rating of that company, what is the interest rate, for how many years, and what will be the method of interest payment. Be careful if an issue is offering unusually high interest but has a low rating.

    Step 4: Apply during public issue

    When a new NCD issue opens, you can apply online. All you have to do is login to the app or website and apply in the relevant issue. You can make the payment through UPI or net banking. Usually the minimum investment amount is ₹10,000.

    Step 5: You can also buy from the secondary market

    If an issue is already listed, you can also buy it in the secondary market from NSE or BSE. For this, search by entering the name or ISIN of the relevant NCD. From here you can also see its last traded price, yield-to-maturity (YTM) and liquidity.

    Read Also: Debentures: Meaning, Features, Types, Benefits and Risks

    Important Factors to Check Before You Buy NCDs

    Before investing in NCDs, it is very important to understand some important things, because investing only by looking at the high interest rate can cause loss in the future. By keeping in mind the points mentioned below, you can take a better and safer decision.

    • Credit rating : The most important aspect of any NCD is its credit rating. This rating is given by agencies like CRISIL, ICRA, or CARE and it tells whether the company will be able to return the interest and principal on time or not. AAA rating is considered the safest, while A or BBB rating has some risk attached. It is wise to stay away from issues with a lower rating than this.
    • Coupon rate vs inflation : Whatever be the interest of NCD, the real benefit from it is only when it is above inflation. If the coupon rate of NCD is 9% but inflation is running at 6%, then your real return will be considered only 3%. Therefore, along with the interest rate, definitely look at the inflation trend.
    • Tenure and liquidity : Every NCD has a fixed maturity period some are 1 year and some are 5–10 years. Pay attention to whether the NCD is listed on the exchange (NSE/BSE), and what its trading volume is. Because if you need, will you be able to sell it before time?
    • Call and put option : Some NCDs have a call option, through which the company can return the money before the stipulated time. At the same time, the put option also gives the investor the right to get the money redeemed from the company at the stipulated time. So before applying, check whether there is any early redemption clause.
    • Secured or unsecured : If the NCD is secured, then your money is protected by the company’s assets. But if the NCD is unsecured, then it may be difficult to get the money if the company defaults. So understand the structure of the NCD and if needed, give preference to secured NCDs.

    Where to Track Your NCD Investments?

    After investing in NCDs, it is important to keep monitoring your portfolio. This will ensure you get accurate information about interest payments, maturity date and holding value. You can easily track your investments through the following means:

    • Demat account and broker platform : If you have invested through a platform like Pocketful, you can track your investment live by going to the holdings section of the app or website.
    • Consolidated Statement of CDSL/NSDL : Every month, CDSL or NSDL sends a consolidated account statement (CAS) containing complete details of all your demat investments be it shares or NCDs. You can download it via email or portal.
    • Interest statement for tax : At the end of the year, the details of interest received on NCDs are sent to you by your broker firm or company. This interest statement is very useful to you at the time of tax filing, because interest income is added to your income.

    Tax Implications of NCDs in India

    Interest from NCDs is included in your other income and is taxed as per your income tax slab whether you are in the 5%, 20% or 30% tax bracket. There is no indexation or exemption for it in FY 2024–25

    TDS mechanism – who deducts, when and how much?

    If the aggregate of NCD interest paid by a company in a financial year exceeds ₹10,000, the company applies 10% TDS under Section 193 or 194A. This rate can go up to 20% if you do not provide PAN. But if your total taxable income is below the minimum limit, TDS can be avoided by filing Form 15G/15H.

    Capital Gain Tax – When you sell NCDs

    • If you sell a listed NCD before 12 months, it is called Short‑Term Capital Gain (STCG) and will be taxed as per your income slab.
    • If you sell after 12 months, it becomes Long‑Term Capital Gain (LTCG), which is taxed at 12.5% (without indexation) in FY 2024–25. Note that indexation benefit is not available on NCDs.

    TDS exemption – special facility for senior citizens

    As per Budget 2025, TDS exemption on interest income for senior citizens (60+) has been increased to ₹1,00,000 This improves their cash flow and reduces their tax burden.

    Pros and Cons of Buying NCDs

    Pros

    • Higher returns than FDs : NCDs often offer higher interest rates than Fixed Deposits such as 9%-11%, which can improve your returns.
    • Regular and fixed income : These debentures pay interest at a fixed interval monthly, quarterly or annually. This gives you a predictable cash flow.
    • Variety of investment options : In NCDs, you can choose the option according to your needs such as secured vs unsecured, or short-term vs long-term.
    • Trading possible due to listing on the exchange : You can buy/sell listed NCDs in the secondary market, which also provides some liquidity.

    Cons

    • Risk of default : If the company gets into a financial crisis, there may be a default in returning the interest or principal. Unsecured NCDs have higher risk.
    • Premature withdrawal is not possible : NCDs have a lock-in period and unlike FDs, you cannot break it in the middle. Yes, you can sell it in the secondary market once it is listed, but that is also not easy.
    • Low liquidity : Not every NCD finds a buyer in the secondary market, due to which liquidity risk remains.
    • Market risk and rating downgrade : If the company’s credit rating goes down, then both the value and demand of your NCD can fall.

    Conclusion

    NCDs have become a sensible investment option in today’s times for those who want stable earnings but prefer to stay away from the volatility of the stock market. If you invest after carefully understanding the rating of the company, interest rate and tenure, then it can be a reliable investment for the long term. But it is most important to gather information before every investment and take a wise decision.

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    Frequently Asked Questions (FAQs)

    1. What is an NCD?

      NCD is a fixed return investment, which is issued by a company.

    2. How to buy NCD online in India?

      You can buy NCDs online from platforms like Pocketful, only a Demat account is required.

    3. Are NCDs safe?

      High-rated secured NCDs are considered relatively safe, but there is some risk.

    4. What is the current NCD interest rate in 2025?

      The rate of NCDs in FY2025 is around 8% to 10.5%.

    5. Can I exit NCDs before maturity?

      Yes, you can sell listed NCDs before maturity.

  • What is Volatility Arbitrage?

    What is Volatility Arbitrage?

    Stock prices do not always move upward or downward consistently. Instead, they often experience volatility, meaning frequent fluctuations. Some traders use this volatility as an opportunity through a strategy known as volatility arbitrage. Unlike traditional trading methods that rely on price direction, this strategy focuses on profiting from the market’s unpredictable behavior.

    In this blog, we will understand what a volatility arbitrage strategy is, how it works and why it is becoming increasingly popular among traders.

    Basic understanding of Volatility

    Volatility is a statistical measure of the degree of variation in the price of a financial instrument over time. In simple terms, it reflects how much and how quickly prices move. When the price of a stock or index fluctuates very rapidly, it is called “high volatility”. Whereas when the movement is less, it is called “low volatility”. But volatility is not just the movement of prices, but it is also an indication of risk and uncertainty.

    Implied Volatility vs Historical Volatility

    • Implied Volatility (IV): This is an estimate of the volatility that is already linked to the price of the option. That is, it gives us an idea about what traders think about how volatile the prices can be in the future.
    • Historical Volatility (HV): This is based on the movement of a stock in the past days, that is, how much fluctuation happened earlier.
    • Realized Volatility (RV): Actual volatility observed after the trade or over the chosen holding period.

    It is very important to understand the difference between them, because the base of volatility arbitrage rests on this difference.

    Role of volatility in option pricing

    Volatility directly affects the price of an option. High volatility = expensive options, and low volatility = cheap options. Therefore, understanding volatility in option trading is as important as understanding price trends.

    Tools to measure volatility

    • VIX Index (India VIX): Estimate volatility coming from Nifty options
    • IV Chart: To track the implied volatility of a stock or index
    • Option Chain Analysis: IV and premium comparison

    Sometimes the stock price remains stable, but volatility increases. For example the week before the results. The stock is not moving much, but investors are feeling uncertainty, which increases IV.

    To understand the volatility arbitrage definition properly, it is first necessary to understand the behavior of this volatility. This is the first step to moving towards strategies like volatility arbitrage.

    Read Also: Commodity Arbitrage – Types & Strategies in India

    What is Volatility Arbitrage?

    Volatility arbitrage is a trading strategy that focuses more on the uncertainty of a stock or index rather than its price movement. In this strategy, traders compare the volatility estimates hidden in the price of options with the fluctuations in the real market. When there is a difference between the two, that is where the trading opportunity arises.

    This strategy is considered special because in this, no bets are placed on whether the price will go up or down. In this, traders focus on how much the market will move, i.e. how much volatility it will have. For this reason, it is also called a market-neutral strategy, which provides protection from directional risk to a great extent.

    In which instruments is this strategy used?

    Volatility arbitrage is used in many different markets, such as:

    • Equity options : based on a single stock (e.g. HDFC, TCS)
    • Index options : based on broader markets (e.g. NIFTY, BANKNIFTY)
    • Commodity options :  like gold or crude oil
    • Currency options : like USD-INR

    Most professional traders in India apply it to index options as they have both high liquidity and volatility.

    How does Volatility Arbitrage work?

    • Identification: First, options are found in which the volatility estimate (IV) is higher or lower than the reality.
    • Creating a position: An option trade setup is created that is delta-neutral, i.e., does not have much impact on the directional move.
    • Hedging: The option trade is hedged by taking a position in the underlying asset.
    • Realization: As time passes, the actual volatility in the market is revealed. If it matches your estimate, you make a profit.
    • Understand with a simple example : Suppose the option price of a stock is indicating that there can be a huge movement in the next month (IV is high), but you think that the movement will be less by looking at the past data and the current environment. In such a situation, you can sell that option. If the stock actually remains stable, then the value of the option falls and you make a profit.

    How Volatility Arbitrage Strategy Works – Step-by-Step Guide

    To understand the volatility arbitrage strategy, it is important to look at it in stages. It is not a simple trading, but every step is a well-thought-out risk and mathematical planning. The complete process of its working is given below in detail:

    Step 1: Identify mispricing in volatility

    Identify mispricing in volatility by checking where Implied Volatility (IV) is much higher or lower than Historical Volatility (HV). Later, during the trade, compare IV against Realized Volatility (RV) to see if your forecast was correct.

    Step 2: Create a Delta-Neutral position

    Once you have found the opportunity, the next step is to create a delta-neutral setup. In this, an option structure is chosen in which the effect of directional movement is minimal. For example:

    • Long straddle
    • Short strangle

    The idea is that the price moves up or down, and profits are based solely on volatility.

    Step 3: Hedge the Underlying

    Maintaining a delta-neutral position requires that you buy/sell the underlying asset in the correct amount. This neutralizes directional risk to a large extent and you are actually betting only on volatility.

    Step 4: Monitor Implied vs Realized Volatility

    It is important to constantly analyze the changes in IV and RV during the trade. If you have taken a long volatility position, you want RV to increase. And if you have a short volatility position, you want RV to remain stable or low.

    Step 5: Exit at the right time

    As soon as the volatility in the market changes as per your expectations, or the mispricing of the option ends, that is when you should close the trade. Delaying can reduce profits or increase the risk of going in the wrong direction.

    Read Also: What is Implied Volatility in Options Trading

    Common Volatility Arbitrage Strategies

    Volatility arbitrage strategy can be adopted in many forms according to different trading conditions. Here we will understand some common strategies popular in India and used by professionals, which help in earning profit from the difference between implied and realized volatility.

    1. Long Volatility Arbitrage

    When the Implied Volatility (IV) of an option is very low and you feel that there will be a sudden big movement in the market (e.g. earnings, budget, RBI policy), then you use Long Vol Arbitrage. In this, ATM or OTM call and put options are bought, such as Long Straddle or Strangle.

    Objective: To earn profit in option premium due to increase in volatility.

    2. Short Volatility Arbitrage

    When IV is very high but the actual volatility in the market is likely to remain stable, then this strategy is adopted. In this, the trader sells options — such as Short Strangle or Iron Condor. This is beneficial when the market remains sideways or less volatile.

    Objective: Earn money from the fall in option premium due to decrease in volatility.

    3. Volatility Spread Arbitrage (Statistical Arbitrage)

    It involves taking trades by looking at the volatility spreads between two related stocks or indices. For example, in NIFTY and BANKNIFTY, if the IV of one has increased sharply and the other has not, then a statistical arbitrage setup can be created by going long one and shorting the other.

    Example: IV spike in BANKNIFTY and stability in NIFTY – benefit of volatility spread here.

    • Option Spreads for Volatility Arbitrage : Some traders use calendar spreads (buy/sell at different expiry) or ratio spreads (multiple contracts) to profit from volatility while reducing directional risk.
    • Calendar Spread: When near-month IV is low and far-month IV is high
    • Ratio Spread: When expected move is limited and IV is likely to fall

    Tools and Indicators Used by Arbitrage Traders

    A strategy like volatility arbitrage is based not just on concepts but on accurate tools and real-time data. Today, there are platforms available that provide traders with all the tools they need to make volatility-based decisions. Below, we discuss the core indicators and features that make this strategy professional and practical.

    • Implied Volatility (IV) Analysis : Implied volatility is the predictions that the market makes about the future price movement of an asset. A good IV Scanner provides strike-wise and expiry-wise breakdowns to detect hidden mispricings within options which is crucial for volatility arbitrage.
    • Option Greeks Panel : Greeks like Delta, Vega, and Gamma help manage volatility arbitrage, especially Vega, which shows the sensitivity of the option to changes in IV. A smart Greeks panel keeps your positions balanced and risk-neutral by showing real-time exposure.
    • Volatility Surface Visualization : The IV Surface is like a 3D map that shows volatility behavior at different expiries and strikes. This makes it easy to spot unusual distortions and arbitrage-worthy gaps which are difficult to detect manually.
    • Strategy Builder with Backtesting : Multi-leg strategies are common in volatility arbitrage. An intuitive strategy builder allows creating complex structures such as calendar spreads, straddles or Vega-neutral setups without coding knowledge. Backtesting on real market data gives confidence before execution.
    • Real-Time Volatility Tracker : The market moves fast and volatility-based signals do not last long. A centralized dashboard that live tracks IV changes, option spreads and unusual activity making arbitrage decisions fast, data-backed and confident.

    Challenges & Risks in Volatility Arbitrage

    Volatility arbitrage is a well-known strategy, but it is extremely difficult to execute correctly. Here are some of the challenges that often impact traders in the live market:

    • Market Liquidity and Wide Spread Impact : Options contracts do not have equal liquidity at every strike. Sometimes you have to trade at such a wide bid-ask spread that losses start as soon as you take a position. This makes short-term arbitrage opportunities practically ineffective.
    • Execution Speed and Platform Reliability : This strategy demands ultra-fast execution without delay. If your terminal is slow or there is lag in order flow, the edge is completely lost. Hence, a system that can provide stable execution in real-time is a must.
    • Error in Volatility Forecast and Vega Risk : This strategy relies on the estimation of implied volatility. If the future movement of volatility is misread or Vega exposure is high, the entire position is at risk. Hence, it is important to constantly monitor the Greeks.
    • Difference between Realized and Implied Volatility : Sometimes the volatility you expect while entering a trade does not come in the market later. Due to this mismatch, the strategy can give losses even though it looks neutral.
    • Breaking News and Sudden Volatility : Events like earnings, RBI announcements or global tension can suddenly increase or decrease volatility. In such a situation, if hedge or risk controls are not set, capital can be eroded quickly.
    • Constant Monitoring and Active Management : This strategy is not something to be set up and left. It requires constant monitoring – Greeks, exposure, volatility shift and PnL tracking. In such a situation, a good terminal like Pocketful’s trading dashboard helps a lot, which provides real-time volatility tracking, live Greeks analysis and scalping tools.

    Volatility arbitrage seems simple on paper, but is equally demanding in the live market. This is not just a strategy, it is a full-time active process in which execution, analytics and speed all contribute equally.

    Conclusion

    Volatility arbitrage is a thoughtful and advanced strategy that monitors the movement within the market, not just the direction of the price. It is effective only for those traders who understand the data deeply and use the right tools. But entering it without preparation or understanding can be harmful. Therefore, it is important to approach this strategy with good study, proper risk management and discipline before adopting it.

    S.NO.Check Out These Interesting Posts You Might Enjoy!
    1Arbitrage Mutual Funds – What are Arbitrage Funds India | Basics, Taxation & Benefits
    2Arbitrage Trading in India – How Does it Work and Strategies
    3Reverse Cash and Carry Arbitrage Explained
    4Commodity Trading Regulations in India: SEBI Guidelines & Impact
    5Top Algorithmic Trading Strategies

    Frequently Asked Questions (FAQs)

    1. What is volatility arbitrage in simple terms?

      When a trader tries to make a profit by predicting the volatility of the market, it is called volatility arbitrage.

    2. Is volatility arbitrage risky?

      Yes, if the prediction is wrong or the data is not correct, then this strategy can be harmful.

    3. Do I need advanced tools for this strategy?

      Yes, real-time data and fast execution tools are very important for this strategy.

    4. Can beginners use volatility arbitrage?

      Beginners should first learn basic strategies, then gradually adopt such advanced strategies.

    5. Is volatility arbitrage legal in India?

      Yes, it is legal as per SEBI rules, as long as you follow fair practices.

  • What is Nominal Yield?

    What is Nominal Yield?

    If you’ve ever explored the bond market, you’ve likely come across the term nominal yield. While it might sound technical at first, the concept is actually quite straightforward.

    In this blog, we’ll break down what nominal yield means, how to calculate it step by step, when it’s useful, etc. Whether you’re new to bonds or simply refreshing your knowledge, this guide will help you understand nominal yield with ease.

    Understand the Nominal Yield 

    The interest amount a bond pays you annually expressed as a percentage of its face value is known as the nominal yield, or coupon yield. It is calculated by dividing the annual coupon payment by the bond’s face value. Nominal yield does not take into account the bond’s market price, purchase price, or holding period.

    Some Points to Remember: 

    • The nominal yield remains constant regardless of the bond’s market price.
    • Buying the bond for more or less than its face value has nothing to do with your nominal yield.
    • Additionally, you should consider factors like the yield to maturity (YTM) and current yield if you want a better idea of your actual earnings.

    Nominal Yield Formula 

    Nominal Yield = (Annual Coupon Payment / Face Value of the bond) * 100

    where, 

    1. Annual coupon payment is the fixed interest amount the bond pays you every year. 
    2. Face Value is the original value of the bond 

    Step-by-Step Calculation 

    Suppose you have a bond that is worth ₹1,000 and every year it pays you ₹80 as interest or coupon payments, which is called the annual coupon.

    Step 1: Find out the annual coupon payment

    This is the interest amount the bond pays you every year. In this case, it’s ₹80.

    Step 2: Find out bond’s face value 

    The face value (also called par value) is the original value of the bond, i.e., the amount the issuer agrees to repay the bondholder at maturity. In most cases, bonds are issued with a face value of ₹1,000 (sometimes ₹100 for smaller bonds). In this example, it is ₹1,000.

    Step 3: Apply the Formula 

    So here:

    Nominal Yield = (80 /1000) × 100 = 8%

    Step 4: What does that mean?

    It means that your bond will pay you 8% of its face value of ₹1,000 each year. As long as you keep the bond, you will receive ₹80 every year.

    Uses of Nominal Yield 

    1. Immediate Bond Comparisons

    Are you having trouble choosing between several bonds? You can quickly figure out which one pays higher interest based on face value by looking at nominal yield.

    For instance, you already know that Bond B pays you more annually, without using a calculator if Bond A has a nominal yield of 7% and Bond B has 9%.

    2. A Simple Method to View Your Interest Income

    Simply put, nominal yield indicates how much money you will receive annually from the bond. It is helpful when all you want to know is, “How much will I earn?

    3. Effective, If the Bond Is Up to Par

    Nominal yield actually provides you with a fairly accurate picture of your return if the bond is selling for the same price as its face value.

    4. Ideal for New Investors

    Nominal yield is a simple way for beginners to understand bond returns. It shows the fixed annual interest as a percentage of the bond’s face value, without involving complex calculations or market price fluctuations.

    5. Useful for Financial Planning

    Nominal yield makes financial planning easier if you are looking for a steady income by estimating how much you will receive annually.

    Read Also: What are Bond Yields?

    Difference between Nominal Yield & Current Yield 

    FeatureNominal YieldCurrent Yield
    DefinitionThe bond’s fixed yearly interest based on face valueThe return you’re getting right now based on the market price of the bond
    Formula(Annual Coupon ÷ Face Value) × 100(Annual Coupon ÷ Market Price) × 100
    What’s it based on?The original value of the bond (face value)The actual market price of the bond
    Does it change?No, it stays the sameYes, it moves as the bond’s market price changes
    Good for beginners?Absolutely. very simple to understandYes, but you need to know the bond’s market price
    Consider Market Price?NoYes

    Limitations of Nominal Yield

    1. It overlooks the true cost you incurred

    Nominal yield doesn’t consider the bond’s purchase price; it only considers its initial (face) value. Therefore, the return on investment isn’t as high or low as it might appear if you purchase a bond for more or less than its face value.

    2. Ignores the Bond’s Remaining Time

    The nominal yield remains constant whether a bond matures in two years or twenty.

    3. Ignores the Wider Picture

    Nominal yield solely considers the annual interest you receive. It doesn’t account for things like;

    • Variations in the market value of the bond
    • If you decide to reinvest the interest
    • Any increase or decrease in capital
    • Or even inflation

    4. It is Not Very Helpful If the Bond Isn’t Real

    Particularly in the secondary market, most bonds are not traded at their exact face value. The nominal yield may provide a completely inaccurate picture of the true return if a bond is being sold at a premium or discount.

    5. It is Not the Best Option for Long-Term Planning

    It is not the most reliable figure if you plan on investing long-term because it leaves out a lot of information, such as future interest rate changes or how long you will hold the bond.

    Read Also: What is Coupon Bond?

    Conclusion 

    If you want to quickly gauge how much interest a bond pays annually, nominal yield is good. It is simple, easy to understand, and ideal for situations in which a bond is trading at face value.

    But remember, it just gives you an overview. The expected total return, the number of years you will hold the bond, and the actual price you paid are not considered. For a more complete picture, you should also consider other metrics like yield to maturity (YTM) and current yield.

    The bottom line? Nominal yield is a useful starting point, but it should not be the only factor in your decision-making. Think of it as the starting point for smarter, more informed bond investing.

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    1What Is Bowie Bond (Music Bonds)
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    3What Are Corporate Bonds?
    4CAT Bonds: An Easy Explainer
    5Electoral Bonds Explained

    Frequently Asked Questions(FAQs)

    1. Is the nominal yield just another word for the interest rate?

      Yes! The coupon rate is also known as the rate the bond promises to pay each year.

    2. Is it possible for nominal yield to change over time?

      No! Even if the market price goes up or down, it stays the same for the life of the bond.

    3. What sets apart current yield from nominal yield?

      Current yield is based on the bond’s current market price, which is generally more accurate than nominal yield, and is based on the bond’s face value.

    4. Is nominal yield useful if I did not pay full price for the bond?

      Not really. If you bought the bond for less or more than its face value, the nominal yield does not reflect how much money you actually made.

    5. Do zero-coupon bonds have a yield?

      No! They do not have a nominal yield because they don’t pay interest every year.

  • How to Calculate F&O Turnover for Trading?

    How to Calculate F&O Turnover for Trading?

    If you trade in F&O i.e. futures and options, then it is very important for you to understand the F&O turnover calculation. It is not only necessary for income tax filing, but it also determines whether you have to get a tax audit done or not. Often people get confused about how to calculate F&O turnover, or whether premium should be included in option turnover calculation or not. 

    In this blog, we will explain to you in simple language how the turnover is calculated for intraday trading and F&O trading, and how it can be calculated correctly.

    What is F&O Turnover in Trading ?

    F&O turnover means the total absolute value of profit and loss in futures and options trading, that is, the figure obtained by adding the profits and losses in all the trades done in the whole year without any plus or minus. From the point of view of income tax, F&O trading is considered non-speculative business income, so knowing its turnover is important for many tax related matters – such as the need for tax audit, choosing the right ITR form and taking advantage of the presumptive scheme under section 44AD.

    For example, suppose you made two deals in futures trading – the first one resulted in a profit of ₹30,000 and the second one resulted in a loss of ₹20,000. In such a case, the turnover will be considered as ₹50,000 (₹30,000 + ₹20,000). Here only the absolute value is taken, that is, the loss is also added by adding plus.

    If we talk about option trading, then along with the absolute value of profit and loss, the premium of the option sold is also added to the turnover. For example, if you sold an option at a premium of ₹ 50 and incurred a loss of ₹ 1,500, then the total turnover will be considered as ₹ 1,550. However, many brokers already add the premium to the P&L in their reports, so it is important to read the report carefully before adding it again.

    Segment-wise calculation for F&O turnover? 

    Calculating turnover is an important process in F&O or Futures & Options trading, especially when you have to decide whether you need to get a tax audit done or not. The method of calculating turnover is different for each segment Futures, Options, and Intraday. Its complete information is given below:

    How to Calculate Turnover in Futures Trading?

    To calculate turnover in the Futures segment, all the profits and losses of the year have to be added to the absolute value. That is, whether it is profit or loss, both are considered positive and added.

    Formula : Futures Turnover = Absolute Profit of all trades + Absolute Loss

    Example: If there is a profit of ₹ 40,000 in one trade and a loss of ₹ 25,000 in the other, then the turnover will be ₹ 65,000.

    Trade NumberProfit/LossCalculation (Absolute Value)
    Trade 1₹40,000 Profit (+)₹40,000
    Trade 2₹25,000 loss (-)₹25,000
    Total Futures Turnover₹65,000

    How to calculate turnover in options trading?

    While calculating turnover in options, two things are added:

    • Absolute value of all profits and losses
    • Premium received from option sale (writing)

    Formula : Options Turnover = Premium received on sale + Absolute profit/loss from trades 

    Example: If you sold an option at a premium of ₹120,000 and Trade 1 : ₹10,000 profit Trade 2 : ₹5,000 loss, then the total turnover will be ₹135,000.

    Trade DetailsProfit/LossCalculation (Absolute Value)
    Premium received on sale₹1,20,000 ₹1,20,000 (premium received on option sold)
    Trade 1₹10,000 Profit (+)₹10,000
    Trade 2₹5,000 Loss (-)₹5,000
    Total Options Turnover₹135,000

    Calculation of F&O turnover in intraday trading

    If you have bought and sold Futures or Options in a single day (Intraday), then it is considered a speculative trade. In such a situation, while calculating turnover, the profit and loss of all trades have to be added to the absolute value.

    Example: ₹6,000 profit and ₹3,000 loss – turnover will be ₹9,000.

    How to calculate turnover in intraday trading?

    Intraday trading, i.e. when you buy and sell shares on the same day (do not take delivery), the method of calculating turnover is slightly different. Here also, not net profit/loss but absolute value is added.

    Intraday Turnover = Absolute Profit + Absolute Loss of all trades

    Trade DetailsProfit/LossCalculation (Absolute Value)
    Trade 1 ₹5,000 Profit (+)₹5,000
    Trade 2 ₹3,000 Loss (-)₹3,000
    Trade 3 ₹2,000 Profit(+)₹2,000
    Total Turnover₹10,000

    F&O Turnover calculation for Income Tax Filing

    F&O or Futures & Options trading is considered non-speculative business income. This means that if you make a profit or loss in F&O, then it has to be shown as business income in the income tax return for this, ITR-3 form is usually filled.

    When is a Tax Audit necessary?

    Turnover (annual turnover)What is your declared profit?Is audit necessary or not?
    ₹10 crore or lessProfit is 6% or more (in digital transactions)No audit required
    ₹10 crore or lessProfit is 8% or more (in cash transactions)No audit required
    ₹10 crore or lessProfit is less than 6%/8% or there is continuous lossAudit is mandatory (Section 44AB applicable)
    Above ₹10 croreIrrespective of the profitAudit is necessary in all circumstances

    “F&O turnover is below ₹2 crore, and you declare profits of at least 6% or more of turnover under Section 44AD. 

    If Turnover is between ₹2 Crore and ₹10 Crore and more than 95% of transactions are digital, a tax audit is not necessary, regardless of profit or loss (Section 44AB).

    – In these two cases audit is not required”

    Common Mistakes in F&O Turnover Calculation

    While calculating F&O turnover, many traders make some important mistakes, which can later create problems in income tax filing. Due to lack of correct calculation, there is not only the risk of filling the wrong ITR form, but an audit may also be required.

    • Considering contract value as turnover: Many people assume that the entire contract value of futures or options is their turnover. Whereas in reality, only profit or loss (which has actually occurred) is added for turnover calculation.
    • Ignoring option premium: It is necessary to include the premium received on options sold in the option turnover calculation. Just taking the difference of buy/sell price is not enough.
    • Excluding loss transactions from calculation: Traders often focus only on profit and ignore losses. Whereas in F&O turnover calculation, both profit and loss have to be added in the absolute value.
    • Choosing the wrong ITR form: Due to incorrect calculation of turnover, many times traders choose the wrong ITR form, like filling ITR-2 or ITR-4 instead of ITR-3, which may later lead to a notice.

    Real-Life Scenarios: How Traders Handle Turnover Calculation

    Every trader has a different trading strategy, some trade less frequently, some trade high volumes daily. These habits determine the calculation of turnover and the requirement for a tax audit. Below are some real-life cases that will help you understand turnover.

    Case 1: Low Volume F&O Trading

    If a few F&O trades are made on a monthly basis and the total turnover is less than ₹10 lakh and the profit is also below the basic exemption limit, then a tax audit is not required. The return can be filed easily through ITR-3 form.

    Case 2: High Volume Intraday + F&O

    If intraday or option trading is done on a daily basis and the turnover reaches ₹2 crore or more, then tax audit becomes mandatory irrespective of how low the profit is as the turnover threshold has been crossed.

    Case 3: High Premium Income from Selling Options

    If option selling is done on a regular basis, and a premium of lakhs of rupees is generated from it, then that entire premium is counted in the turnover. Due to this, the turnover limit can be exceeded quickly, and in such a case also it becomes necessary to get an audit done, irrespective of the actual profit or loss.

    Conclusion

    A correct understanding of F&O turnover is not only important while filing taxes but is also crucial for transparency and long-term compliance of your trading activities. Whether you are doing intraday trading or dealing in options, ignoring turnover calculations can prove costly. Hopefully this guide has given you clear and updated information so that you can do tax planning with confidence and avoid mistakes while filing income tax returns. Correct calculation is the first step towards correct taxes and a strong financial plan.

    Frequently Asked Questions (FAQs)

    1. What is F&O turnover in income tax?

      F&O turnover includes profit/loss of closed trades and sale value (premium) of options.

    2. Is audit required for F&O turnover?

      Yes, if annual turnover exceeds ₹10 crore or if profit is less than 6%/8% of turnover (depending on digital transaction percentage).

    3. How to calculate F&O turnover for ITR?

      Turnover is calculated by adding premium received of options and profit/loss of closed trades.

    4. Which ITR form for F&O trading?

      ITR-3 is mandatory as F&O income is classified as non-speculative business income.

    5. Is F&O income a business income?

      Yes, it is considered as non-speculative business income.

  • What is an Underlying Asset?

    What is an Underlying Asset?

    You may have come across terms like options, futures, or exchange-traded funds (ETFs) while learning about investing and trading. In many of these discussions, you’ll often hear the phrase “underlying asset.” An underlying asset is the actual financial instrument that a derivative or product is based on. It could be a commodity like gold, a stock such as XYZ, or even a market index like the Nifty 50. 

    In this blog, we’ll explain what underlying assets are, why they matter, and the different types you’re likely to encounter as an investor or trader.

    Underlying Asset : An Overview

    An underlying asset is the financial instrument on which a derivative’s value is based. It might be a currency, an index like the Nifty 50, a stock, or even a commodity like gold. The price of a derivatives contract, such as a stock option or futures contract, is therefore determined by the value of the underlying asset.

    Example: Let us say you bought a call option of a stock named ABC Industries. The value of that option is derived from ABC’s actual stock. Thus, the underlying asset is the ABC’s shares. Your option increases in value if the stock price rises.

    Read Also: What is Derivatives?

    Why are Underlying Assets Important? 

    1. They Add Value to Financial Products

    Suppose the underlying asset is similar to an automobile’s engine. The entire structure is powered by it. An option on XYZ stock or a gold future only has value because it is tied to the stock or gold itself. Without the underlying, the derivative contracts are worthless.

    2. They Help You Understand Risks

    The behaviour of various assets varies. While some, like gold or bonds, move more slowly, others, like stocks, fluctuate a lot. By understanding the underlying asset, you can better gauge volatility, risk exposure, and whether the derivative product associated with it fits your comfort zone or not. 

    3. Used to Value Derivatives Contracts

    If you trade options or futures, this is a crucial one. The reason those derivatives contracts exist is because they are linked to the underlying, which is a real asset. That asset, whether it be a stock, index, wheat, or crude oil, is what gives the derivative contract its value.

    4. They Allow You to Hedge

    Underlying assets also make hedging possible. A farmer worried about wheat prices falling, or an investor concerned about a market downturn, can use futures or options contracts to lock in prices and reduce risk.

    Characteristics of the Underlying Assets

    1. Liquidity

    Essentially, liquidity refers to how simple it is to buy or sell something. Large-cap stocks are generally liquid. Usually, you can buy or sell in a matter of seconds. However, there might not be many buyers or sellers for lesser-known assets, so you might be compelled to wait or accept an unfavourable price.

    2. Volatility

    Volatility measures how much an asset’s price moves over time. High volatility means larger price swings, which create both higher risk and greater potential rewards. Low volatility signals more stable prices and slower, steadier growth. Understanding volatility is especially important when trading derivatives like options or futures, since their value is directly influenced by price fluctuations in the underlying asset.

    3. Transparency

    You want assets that provide transparency, where prices, trading volumes, and related news are easily accessible in real time. Stocks, gold, and major currency pairs are usually clear and easy to track. However, if you are dealing with less common instruments that trade in obscure or illiquid markets, it is best to be cautious.

    Types of Underlying Assets

    Now that we have a clear understanding of underlying assets and their significance, we will examine the various kinds that you will come across in everyday life. You may already be familiar with some of these; in fact, you may have invested in them without even knowing they act as underlying assets to their respective derivative contracts.

    1. Stocks

    Shares, also known as stocks, are undoubtedly the most common underlying asset available. When you buy stock options or trade stock futures, you are making a bet on the price movement of the underlying stocks.

    Example: If you buy a call option on XYZ stock, then XYZ stock is your underlying. Therefore, your option gains value if the stock price rises.

    2. Commodities

    These are tangible goods that are traded on exchanges, such as wheat, oil, or gold via derivative contracts. Futures contracts are frequently used by traders to buy or sell them at a fixed rate at a later date.

    For instance, gold is the underlying asset for gold futures & crude oil contracts fluctuate in line with the oil price movements.

    3. Currency

    In the forex market, the most common underlying assets are currency pairs such as USD/INR or EUR/USD. These are especially important for importers, exporters, and international investors who need to manage currency risk. 

    For example, the value of a USD/INR futures contract is determined by the exchange rate between the US dollar and the Indian rupee.

    4. Market Indices

    Instead of trading individual stocks, you can trade entire indices such as the Sensex or Nifty 50. This approach is useful if you want exposure to overall market trends without having to pick specific stocks. 

    For example, when you buy a Nifty 50 option, the index itself serves as the underlying asset.

    5. Bonds & Interest Rates

    Even government or corporate bonds and interest rates can be underlying assets. These are usually used in more technical products like interest rate swaps or bond futures.

    For instance – A 10-year government bond future gets its value from—you guessed it—the 10-year G-Sec.

    Underlying Asset vs Derivative Contracts

    FeatureUnderlying AssetDerivative
    What it isThe actual asset (stock, gold, etc.)A contract based on the underlying asset
    Value comes fromIts price in the market determined by buyers and sellersThe price of the underlying asset and buyers and sellers of derivative contract
    ExamplesStocks, gold, currencies, bondsFutures, options, swaps, forwards
    OwnershipYou own the real assetYou own a right/obligation, not the asset
    Risk levelDepends on asset typeUsually higher due to leverage and time constraints

    Risks Associated with Underlying Assets

    1. Price fluctuations

    Markets can be unpredictable. Prices of stocks, gold, oil, or even currencies can move up and down significantly for a number of reasons. Your investment returns may suffer if your underlying asset moves in the wrong direction.

    Consider the following scenario: You bought a call option anticipating a rise in XYZ stock, but the price of the stock falls instead. Your option may suddenly lose most or all of its value.

    2. Risk to the Market

    High volatility during recessions, wars, or global financial crises can bring everything down, even if your chosen investment is fundamentally sound. It is important to consider the larger picture rather than just your investment.

    3. Issues with Liquidity

    Some assets are more difficult to buy or sell quickly. It could be difficult to find a buyer quickly when you need to sell something that you own, which could mean accepting a price that is less than what you expected.

    For example, certain niche commodities or small-cap stocks may seem attractive at first, but when it comes time to sell, they can turn out to be highly illiquid and difficult to exit.

    Conclusion 

    Simply put, an underlying asset is the real asset that gives value to financial instruments such as futures, options, exchange-traded funds, and more. Knowing the characteristics of the asset that lies “underneath” your derivative contracts, such as a stock, commodity, or even an index, can help you make better investment and trading decisions.

    It can make a significant difference to know what you are betting on, including its expected movement, liquidity, and news sensitivity. The underlying asset determines the risks and rewards you are taking on, regardless of whether you are trading more actively or making long-term investments.

    Frequently Asked Questions (FAQs)

    1. Is the asset always a stock?

      No, underlying assets can be stocks, bonds, currencies, commodities, or even interest rates.

    2. Are all underlying assets bought and sold on stock exchanges?

      A lot of them are, but not all of them. Some underlying assets, like interest rates, cannot be traded directly.

    3. Is gold a real asset?

      Yes, gold is a great example. There are a lot of derivatives, ETFs, and even mutual funds that are based on it.

    4. Why do I need to consider the underlying asset before trading?

      Because the underlying asset determines the risk, volatility, and potential returns of your trade. Its price movements, liquidity, and behavior directly impact how your trading position will perform and whether it aligns with your expectations.

    5. How do I find the asset that an investment product is based on?

      The product details or fact sheet usually have these details. Always check before investing.

  • Collar Options Strategy – Meaning, Example & Benefits

    Collar Options Strategy – Meaning, Example & Benefits

    It is easy to feel good about your investments when the stock market is doing well. But what if you are worried about a sudden drop in the market but still want to stay invested? This is when the collar options strategy comes in. It is a smart and easy way to keep your profits safe without giving up all the upside.

    We will discuss the collar strategy, how it works, when to use it, and what its pros and cons are in this blog. If you know how to use a collar option strategy, you can lower your risk without missing out on opportunities, whether you are a conservative investor or a seasoned trader.

    Understanding the Collar Options Strategy 

    Applying a collar option strategy to your stock investment is like putting on a seatbelt. It protects your investment positions from big losses while still letting you make some gains, but not unlimited ones. This is how it works:

    If you already own 100 shares of a company, you do two things:

    • Buy an OTM put option; it is like insurance. It makes sure that you can sell your stock for a certain amount of money, even if the market crashes.
    • If you sell an OTM call option, you agree to sell your stock for a price above its current market price and get paid a premium for this.

    These two options positions basically “collar” your investment between a lower and upper limit. They protect you on the downside but limit your upside to some extent.

    Example of Collar Options Strategy

    Let us break down the Collar Strategy using an easy example. Suppose you currently own 100 shares of ABC, and the stock price is ₹1,500 per share. Although you have made decent gains, you are also a little anxious about the volatile market ahead.

    Even though you aren’t interested in selling, you also don’t want to take the chance of seeing your gains vanish in a flash. This is precisely where the collar options strategy is useful.

    Step 1: Buy a Put Option

    You buy a put option with a strike price ₹1,400 (OTM put), giving you the right to sell ABC at that price even if it falls below ₹1,400. It is similar to stating, “I will never sell this for less than ₹1,400.” Assume that each put option has a lot size of 100 shares and costs you ₹3,000.

    Step 2: Sell a Call Option

    You also sell a ₹1,600 strike price call option (OTM strike), so you will have to sell it at that price if ABC rises above ₹1,600. However, you receive ₹3,000 for selling the OTM call option.

    Therefore, the ₹3,000 you made from the call covers the ₹3,000 you spent on the put.

    Because you’ll receive protection from the downside without actually paying out of pocket, it’s frequently referred to as a “zero-cost collar.”

    What Could Happen, Then?

    When your options expire, let’s examine three simple scenarios:

    -ABC drops to 1,300

    Instead of losing more, you sell your shares at ₹1,400 as your put option expires ITM. You have minimised your downside.

    -ABC remains at about ₹1,500.

    Neither option is exercised. Nothing changes; you continue to hold your stock. 

    -Now, ABC surges to 1,650

    However, you will have to sell at ₹1,600 because you sold a ₹1,600 call. You lose on any gains over ₹1,600, but you still earn a fair ₹100 profit per share.

     The result is that using collar option strategy is given below:

    • Selling for ₹1,400 is your worst-case scenario.
    • The best price you can get is ₹1,600.
    • Additionally, you did not allocate any additional funds to protect yourself.

    In other words, you created a haven around your investment, which can be quite satisfying, particularly when the markets are volatile.

    Benefits of Collar Options Strategy

    Some of the benefits of using collar options strategy is given below:

    1. Your Downside Has a Floor

    The put you buy is like a policy that protects you. You know the lowest price you will get, no matter how bad the market gets. That’s real peace of mind.

    2. You do not have to sell your shares

    Are you worried but still believe in the company in the long run? A collar keeps you in the market instead of selling at the first sign of trouble.

    3. Sometimes protection is very cheap  

    The money you make from selling the call can help pay for the put or even pay for it all. So you might be able to protect yourself from losses without spending a lot of money.

    4. Helps you keep the money you’ve already made

    A collar helps you protect your profits if your stock has gone up a lot, but it also leaves some room for your call strike to go up.

    5. You set the range

    Choose the strikes that you feel comfortable with. If you want strong protection and are good with capping gains sooner? Pick strikes that are closer. Want more room for moving up? Go wider.

    Read Also: Options Trading Strategies

    Limitations of Collar Options Strategy

    Some of the limitations of using collar options strategy is given below:

    1. You may lose out on significant profits

    You will likely regret selling that call if your stock unexpectedly rises in value because you will ultimately have to sell it at that fixed price even if it continues to rise. Yes, the collar protects you, but it also limits your earnings.

    2. You Must Own the Stock for It to Work

    This is not an approach that you can use randomly. It is intended to protect what you already own, not a stock you plan to buy in the future, so you must already own the stock.

    3. You will have to Watch It

    Options have expiration dates, so you can’t ignore them entirely. You may need to make some changes or switch to new options if the market becomes volatile or the stock moves a lot.

    4. In an extremely bullish market, it is not the best course of action

    A collar may seem like a disappointment if you believe the stock is going to rise. You will lose out on profits after your call strike because your upside is capped. If you were correct about the rally, that can hurt so badly.

    5. There is a slight learning curve

    Learning how puts and calls operate, how to pick the best strikes, and when to start everything up may take some time if one is unfamiliar with options.

    Read Also: What is Options Trading?

    Conclusion 

    The collar strategy is like putting a helmet on your investment. It might not make your investment journey more fun, but it does make it safer. For investors who want to hold on to a stock they trust while reducing downside risk, it’s a practical choice.

    You can protect yourself from big drops, lock in some gains, and stay invested, all without spending much or even anything at all. Yes, your upside is limited, but for many investors, the peace of mind that comes with the collar options trading is worth it. The collar might be the best way to keep your risk under control, especially after the stock has had a good run recently.

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    Frequently Asked Questions (FAQs)

    1. Is it possible to lose money with a collar options strategy?

      Yes, but only down to the put strike price, so your losses are limited.

    2. What will happen if the stock goes up a lot?

      If it goes above your call strike, you will probably have to sell the stock at that price, which means you cannot earn any more money.

    3. When is the best time to put on a collar?

      When you have already made money on a stock and want to protect it during times of uncertainty.

    4. Can I use a collar on index options?

      You can do something similar with index futures or ETFs, but collars work best with stocks you own.

    5. Is this a good strategy for people who are just starting out?

      Yes, it is one of the easier option strategies and a great way to learn how options can help you control risk.

  • Historical Trend of Gold Rate – Gold Price History in India

    Historical Trend of Gold Rate – Gold Price History in India

    Gold has always held a significant place in Indian households, whether for weddings or investments. Over time, its prices have risen sharply due to factors like geopolitical events, economic changes, and growing demand. 

    In this blog, we will explore the historical trend of gold prices in India, along with the key factors affecting its prices and why the prices of gold have risen exponentially in the last few years.

    Evolution of Gold Prices in India

    The changes in gold prices in India reflect global events, economic policies, and evolving demand. Let’s explore how prices have moved from the 1960s to the present day.

    The Early Days (1960s-1970s)

    • In 1960, the price of gold was around ₹60-₹100 per 10 grams.
    • Unlike today, people generally didn’t own gold, and imports were restricted.
    • Around 1970, the gold prices saw a sharp jump because of rising global oil crises, inflation, and instability in global economic conditions.

    Liberalization Phase (1990s)

    • During the liberalization phase, restrictions on gold imports were lifted.
    • This increases the demand for gold. Hence, pushing the prices above 4000 INR per gram.

    Golden Era (2000-2010)

    • From 2000 to 2010, this period can be called the Golden Period of Gold.
    • The major financial crises, like the dot-com crash and the global financial crisis of 2008, increased the price of gold to around 18000 INR by the end of 2010.

    Covid Period (2019-2021)

    • In the year 2020, the COVID-19 pandemic hit the world and made gold a haven for investors. 
    • Due to COVID, the prices of gold touched around 50,000 INR per 10 grams.

    Current Scenario (2021-2025)

    • Since early 2021, gold has been volatile, fluctuating between ₹48,000 and ₹65,000 per 10 grams.
    • Various global events took place during this period, including the Russia-Ukraine war, rising interest rates, the Israel-Iran conflict, etc. 

    Historical Gold Rates in India

    The table below shows the historical gold rates in the country since 1964:

    YearPrice (₹ per 10g of 24K)
    196463.25
    196571.75
    196683.75
    1967102.50
    1968162.00
    1969176.00
    1970184.00
    1971193.00
    1972202.00
    1973278.50
    1974506.00
    1975540.00
    1976432.00
    1977486.00
    1978685.00
    1979937.00
    19801,330.00
    19811,670.00
    19821,645.00
    19831,800.00
    19841,970.00
    19852,130.00
    19862,140.00
    19872,570.00
    19883,130.00
    19893,140.00
    19903,200.00
    19913,466.00
    19924,334.00
    19934,140.00
    19944,598.00
    19954,680.00
    19965,160.00
    19974,725.00
    19984,045.00
    19994,234.00
    20004,400.00
    20014,300.00
    20024,990.00
    20035,600.00
    20045,850.00
    20057,000.00
    20068,490.00
    200710,800.00
    200812,500.00
    200914,500.00
    201018,500.00
    201126,400.00
    201231,050.00
    201329,600.00
    201428,006.50
    201526,343.50
    201628,623.50
    201729,667.50
    201831,438.00
    201935,220.00
    202048,651.00
    202148,720.00
    202252,670.00
    202365,330.00
    202477,913
    20251,01,660
    (Data as of 28 August, 2025)

    Factors Affecting Gold Rates in India

    The key factors affecting gold rates in India are as follows:

    1. Rising Interest Rate: With the rise in the interest rate, fixed-income securities became more attractive, and investors prefer to invest in fixed-income securities. Due to this, the demand for gold may drop, hence reducing the prices of gold.
    2. Demand: During the festive and wedding season, the demand for gold will increase, and because of limited supply, the price of gold will increase.
    3. Geopolitical Conditions: During geopolitical tensions, wars, trade disputes, or economic crises, gold is considered a safe haven, which increases demand and pushes up its price.
    4. Government Policies: Import duties implemented by the government on gold can directly affect the domestic gold prices. The higher the import duty, the higher the gold price.

    Why are Gold Prices Rising?

    The key factors why the prices of gold are rising are as follows:

    1. Global Tension: Geopolitical tension across the globe, such as the Israel-Iran conflict, the Russia-Ukraine War. The fear of economic slowdown led to an increase in gold prices.
    2. Weakening of Indian Currency: Over the past few months, the rupee has weakened against the dollar, and the import of gold has become more expensive.
    3. Central Bank Purchasing: The central banks of developing countries are purchasing gold in order to reduce their dependency on the US dollar, which increases the demand and price of gold.

    Conclusion

    On a concluding note, historically, gold has always found a way to shine. Indians have always considered gold not only as an investment option but also as a status symbol. In the short run, prices of gold might see some volatility; however, in the long run, the trend has been steadily upward. However, in the past year, because of geopolitical events, the prices of gold have increased exponentially. Therefore, it is advisable to consult your investment advisor before making any investment in gold.

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    Frequently Asked Questions (FAQs)

    1. What is the reason for the daily fluctuation in gold prices?

      Daily fluctuations in gold price are due to the following factors such as global economic conditions, movement in currency prices, geopolitical events, demand and supply of gold.

    2. Which is the purest form of gold?

      24K (carat) gold is considered the purest form of gold and is considered 99.99% pure, followed by 22K (carat) gold, which is generally 91% pure. The remaining 9% is a mixture of different other metals such as copper, silver, etc.

    3. Why are different countries’ central banks purchasing gold?

      The central banks of different countries purchase gold because they want to increase their gold reserves in order to reduce their dependence on the USD. 

    4. How to invest in digital gold?

      There are various modes through which one can invest in gold digitally; the options include Gold ETF, Gold Mutual Fund, SGBs, etc.

    5. How can Indian rupees affect the gold prices?

      When the Indian rupee weakens against the US dollar, imported gold becomes more expensive, driving up domestic gold prices even if global rates remain stable.


  • 10 Best Books on Commodity Trading

    10 Best Books on Commodity Trading

    Books have always been a timeless source of knowledge, offering guidance and insights across every field of life. The world of trading is no different, with countless books written on strategies and market behavior to help readers sharpen their skills and make better decisions.

    What many traders often overlook is that there are excellent books dedicated specifically to commodity trading. These resources explain how commodity markets work and provide strategies, risk management techniques, and analytical approaches that can be applied in real-world trading.

    In this guide, we will explore the 10 best books on commodity trading that every aspiring or seasoned trader should read to strengthen their understanding and approach.

    10 Best Commodity Trading Books in 2025

    Commodity trading books are guides that help readers understand how to buy and sell physical goods like oil, metals, agricultural produce, and more through exchanges. These books cover topics such as:

    • How commodity markets work
    • Futures and options trading
    • Risk management in commodities
    • Technical and fundamental analysis
    • Real-life trading examples and strategies

    These books are perfect for both beginners and seasoned traders who are looking to earn from the market. So, here are the best commodity trading books that you must consider. 

    1. Commodities Demystified: A Guide to Trading and The Global Supply Chain – Trafigura

    This book simplifies how global commodity trading really works. It is based on Trafigura’s experience in energy, metals, and minerals. It explains how goods are sourced, stored, blended, and delivered. 

    This book mainly focuses on logistics, risk management, and how traders add value across supply chains. This book helps connect the dots between trading desks and real-world supply networks.

    What the book covers:

    • How commodity trading firms operate
    • Sourcing, storage, and delivery of physical commodities
    • Risk management and arbitrage opportunities in commodity trading
    • Logistics and the global supply chain for commodities

    This book shows how critical commodity traders are to the global economy. It is ideal for beginners and professionals who want to understand trade and global markets.

    Commodities Demystified

    2. Commodity Trading Manual – Board of Trade Chicago 

    This manual is a go-to guide for anyone looking to understand how commodity and futures trading really works. It is published by the Chicago Board of Trade. It offers a detailed look at how futures markets are structured and how traders manage risk through hedging and speculation. 

    It covers everything from agricultural and energy markets to metals and financial futures. With insights on spreading strategies, options on futures, and electronic trading, the book is packed with practical knowledge.

    What the book covers:

    • Futures market structure and clearing
    • Hedging and speculation techniques
    • Major commodity market segments
    • Options and spread strategies
    • Evolution of trading systems

    This is a practical book that shares not only technical details but also strategies that are key to making the right trading decisions.

    Commodity Trading Manual

    3. A Trader’s First Book on Commodities: An Introduction to the World’s Fastest Growing Market – Carley Garner

    This book is beginner-friendly and one of the best books on commodity trading. It makes the world of commodity trading easy to understand. Carley Garner walks readers through the basics here. Right from choosing the right broker to managing margin calls and placing smart trades, everything is shared here.

    The author explains key concepts like order types, profit and loss calculations, and trading plans in a simple, practical way. The book also highlights the emotional side of trading. Also, it guides on how to stay disciplined.

    What the book covers:

    • Market basics and order types
    • Choosing brokers and platforms
    • Risk and margin management
    • Trading plans and discipline

    With real industry insights, it helps new and intermediate traders build a strong foundation. This is one of the reasons why it is called the first book on commodities.

    A Trader's First Book on Commodities

    4. Commodity Conversations: An Introduction to Trading in Agricultural Commodities – Jonathan Kingsman

    This book is a practical and engaging guide for anyone exploring agricultural markets. Jonathan Kingsman, with nearly 40 years of industry experience, explains how supply and demand, seasonal patterns, and global events shape commodity prices. 

    Author also covers risk management techniques like hedging and analysis tools to support smart trading decisions. 

    What the book covers:

    • Market drivers and price trends analysis
    • Risk management and hedging strategies to try
    • Trading strategies and analysis
    • Real-world insights from the field

    With real-life examples and a beginner-friendly style, it stands out as one of the best commodity trading books for understanding agri-commodities.

    Commodity Conversations

    5. The Professional Commodity Trader – Stanley Kroll

    This is a classic book that gives a firsthand look into the world of commodity trading. This book was written by Stanley Kroll who was a respected broker and trader. He shared real trade examples, strategies, and personal lessons learned over decades in the market. 

    Using his knowledge and experience, he shared topics like charting, timing, risk management, and others. He shared the trader psychology with honesty and clarity. Though the book was written quite early, it still shares the insights that will help you greatly.  

    What the book covers:

    • Trade timing and charting methods
    • Market psychology and discipline
    • Practical risk management
    • Real-world trading experiences

    This is a true classic among the best commodity trading books. It is a timeless read for anyone serious about trading.

    The Professional Commodity Trader

    6. The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources – Javier Blas and Jack Farchy

    This is one of the best commodity trading books in recent years. This book is quite engaging and shares the hidden details of the global market. It shares the factors that influence and operate the markets. This includes the bold and often controversial deals made by firms like Glencore and Trafigura.

    These are the trades that shaped geopolitics and built empires trading oil, metals, and minerals. The book dives into real events across war zones, collapsing economies, and emerging markets. This shows how traders operate behind the scenes.

    What the book covers:

    • Rise of trading giants like Glencore
    • Global impact of commodity deals
    • Trading in unstable regions
    • Real-world stories of power and profit

    It is a must-read as this book will help you understand how the global commodity market works. 

    The World for Sale

    7. Hot Commodities: How Anyone Can Invest Profitably in the World’s Best Market – Jim Rogers

    This book is a practical and insightful guide to investing directly in commodities. Jim Rogers explains why resources like sugar, corn, oil, and cotton are long-term wealth creators. This guide also highlights why commodities are key investment options, especially during inflationary periods. 

    He explores how supply and demand drive prices and why commodities move differently from stocks, offering real diversification. This is backed by historical trends and clear logic. Rogers makes the case for investing in raw materials over commodity-linked companies.

    What the book covers:

    • Commodity market cycles and trends
    • Supply and demand fundamentals
    • Direct and indirect investing
    • Strategies for long-term investors

    A solid read for anyone looking to understand real assets and commodities, this book is packed with insights that can help investors greatly.

    Hot Commodities

    8. Diary of a Professional Commodity Trader: Lessons from 21 Weeks of Real Trading – Peter L. Brandt

    This book offers a rare and unfiltered look into the day-to-day life of a professional trader. Peter Brandt documents 21 weeks of real trades. It includes the complete details with charts, analysis, wins, and losses. 

    He shares his approach to trade selection, risk management, and emotional discipline. He also shows the realities of trading beyond the textbook theory. With over 40 years of experience, Brandt gives readers both practical lessons and a glimpse into the mindset of a seasoned trader.

    What the book covers:

    • Real-time trade journaling
    • Technical analysis and setups
    • Risk and money management
    • Trader psychology and discipline

    A grounded and honest guide for serious traders, this is a goldmine. The insights shared here and the detailed highlights can help you trade seamlessly. 

    Diary of a Professional Commodity Trader

    9. The Great Gold, Silver & Crypto Rush of the 21st Century – Michael Maloney

    In this insightful book, Michael Maloney explores how gold, silver, and cryptocurrencies are shaping financial markets. He shares how these assets are shaping the next big shift in global wealth. He shares his deep knowledge of monetary history and financial cycles.

    In the book, he explains why these assets may outperform in the coming decade. The book blends education with strategy. This helps readers understand where opportunities lie in this new economic era.

    What the book covers:

    • Economic cycles and wealth transfer
    • Reasons why gold and silver are safe haven
    • Cryptocurrencies and their role in markets
    • Understanding and developing long-term strategies

    This book is an essential read for those who want to invest in precious metals and digital assets. This helps you trade with clarity.

    The Great Gold, Silver & Crypto

    10. Commodity Crops: And The Merchants Who Trade Them – Jonathan Kingsman and Wouter Jacobs

    This is a detailed book that provides comprehensive insights into agricultural commodity trading. You can find all the information on agricultural commodity trading here. The author shares the trading history and market dynamics of nine essential crops in this book. This combines deep industry knowledge with interviews from top global traders. 

    He also addresses modern issues in this book. Some of these include decarbonising food supply chains and navigating global trade challenges. The book sheds light on pricing, logistics, and market forces. 

    What the book covers:

    • History and trading of key crops
    • Interviews with global commodity traders
    • Market drivers and pricing factors
    • Sustainability in agri-trading

    This is a valuable read for traders, investors, and agri-professionals who are looking for long-term results. 

    Commodity Crops

    Conclusion

    When it comes to trading, the commodity market is a bit complex. You need to understand various aspects to ensure that you are taking the right call. Lack of knowledge and insights can make it hard for you to trade. This is where you can seek help from the books shared here. These books help you understand markets, strategies, and risks. 

    The titles shared above are among the best commodity trading books. These are the perfect choices for all traders. Written by experienced professionals, they provide practical insights into markets, trading strategies, and trader psychology. 

    Ready to start trading smarter?

    Start your trading journey with Pocketful and get the tools and support you need to trade smarter.

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    Frequently Asked Questions (FAQs)

    1. Are commodity trading books suitable for beginners?

      Yes, many of these books are beginner-friendly. They explain key concepts like market structure, trading strategies, and risk management. These books share the hard terms in a simple and practical way. Titles like A Trader’s First Book on Commodities are perfect for starting out.

    2. What types of commodities do these books cover?

      Most books cover a wide range including agricultural products, energy resources like oil and gas, precious metals, and sometimes even cryptocurrency. Some focus on specific areas such as grains, gold, or crude oil.

    3. Do I need trading experience to understand these books?

      No prior experience is required for many of them. Several books are written for readers with zero background and use real-life examples to explain how commodity markets work.

    4. Can reading these books improve my trading decisions?

      Yes, these books provide valuable insights that can help you. These can guide you on how to analyze markets, manage risks, and develop strategies. These also guide you on how to control emotions. This knowledge can lead to more informed and confident trading.

    5. How can I start trading commodities after learning from these books?

      You can open a free account on Pocketful, where you’ll find easy access to commodity markets along with the tools and support to help you apply what you’ve learned.

  • Different Types of Derivatives in India

    Different Types of Derivatives in India

    When it comes to trading in the stock market, derivatives hold a prominent place. They are widely used for hedging risks, speculation, and managing portfolio exposure. Instead of directly owning an asset, derivatives allow traders to take positions based on the expected price movements of underlying instruments such as equities, commodities, currencies, or indices. But do you know that based on the needs, there are different types of derivatives that you can trade in?

    So, if you are willing to start trading in different types of derivatives, then this guide is for you. Know their basics, pros and cons to make the right trading decisions. So, let us get started.

    Understanding Derivatives

    Before we explore the types of financial derivatives, let us quickly understand the meaning of derivatives here. A derivative is a financial contract whose value is derived from the performance of an underlying asset such as equities, commodities, currencies, or market indices. In India, standardized derivatives like futures and options are traded on regulated exchanges such as the NSE and BSE.

    In derivatives trading, the trader does not own the asset directly but agrees to buy or sell it at a future date for a predetermined price. Derivatives are widely used for hedging risks, speculating on price movements, and enhancing portfolio strategies.

    Now, with that being said, let us explore the different types of derivatives here.

    Types of Derivatives

    Derivatives are very important in the Indian financial market. It allows traders to gain the benefit of hedging, speculation, and risk management. There are 4 different types of derivatives that you should be aware of as follows:

    1. Future Contract

    A futures contract is a standardized derivative agreement. Under this, the trader agrees to buy or sell an underlying asset at a fixed price on a future date. They are used for hedging against a volatile market or speculation about future trends. These are marked-to-market daily and gains and losses are settled at the end of each trading day.

    There is no physical delivery in most cases (except for some commodity contracts), but rather cash-settled positions. The use of leverage allows traders to control larger positions with a smaller margin amount. However, it also increases the risk of significant losses. 

    Futures contracts must be settled at expiry. These are best suited for experienced traders who are looking to gain from short-term price fluctuations. Trading discipline is key here.

    Pros of Futures Contracts

    • High liquidity and ease of trade
    • Transparent pricing and exchange regulation
    • Effective tool for price hedging
    • Enables both long and short positions
    • Lower capital requirement due to leverage

    Cons of Futures Contracts

    • Leverage can magnify losses
    • Requires margin maintenance and daily monitoring
    • Involves significant risk for inexperienced traders
    • No ownership of the underlying asset
    • Contracts are time-bound with fixed expiries

    2. Options Contract

    An options contract is a financial derivative that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. Unlike futures contracts, the buyer is not compelled to execute the trade if market conditions are unfavorable. This flexibility makes options a versatile tool for both hedging and speculation.

    There are two types of options. A call option gives the right to buy. A put option gives the right to sell. The buyer pays a premium to gain this right. This limits the risk for the buyer to the premium paid. The seller here carries a higher level of risk. 

    Options are used for both hedging risks and speculating on price movements. There is no actual ownership of the asset, but the right to trade it.

    If you are looking for flexible strategies with controlled risk, these are the best. But you must evaluate the market and trends as well.

    Pros of Options Contracts

    • Limited loss for buyers (only the premium paid)
    • Useful for hedging and speculation
    • Lower capital requirement compared to futures
    • Can benefit from market volatility
    • No obligation to execute the trade

    Cons of Options Contracts

    • Difficult for beginners to understand
    • Time decay can erode value quickly
    • Unlimited risk exposure for sellers
    • Requires precise market predictions
    • Some contracts may have low liquidity

    3. Forward Contract

    A forward contract is a form of customized agreement. These are traded over-the-counter (OTC).  The agreement defines the price and a future date when the buy or sell transaction will happen. These are not traded on formal exchanges like NSE or BSE.

    In other words, these are private contracts. Hence, terms such as price, quantity, and settlement date are mutually decided by the buyer and the seller. Forwards are mostly used by businesses or financial institutions for hedging against future price fluctuations.

    There is no daily settlement or margin requirement. However, the absence of exchange regulation also increases counterparty risk. The lack of standardization makes them less accessible for retail traders.

    Forward contracts are suitable for parties with specific hedging needs. Traders who prefer tailor-made terms over exchange-based standard contracts, usually use these.

    Pros of Forward Contracts

    • Custom terms and flexible structure
    • Useful for hedging long-term exposure
    • No margin requirements
    • Can be tailored to match business needs
    • No exchange fees or formal listing costs

    Cons of Forward Contracts

    • Higher counterparty risk
    • Lack of liquidity and public pricing
    • No regulatory oversight
    • Difficult to exit or transfer before maturity
    • Not suitable for small or retail traders

    4. Swaps Contract

    A swaps contract is a private agreement. Under this, two parties exchange cash flows or financial instruments over a specific period. These contracts are traded over-the-counter (OTC). You cannot trade them on exchanges like NSE or BSE. 

    There are two types of swaps. These are interest rate swaps and currency swaps. 

    In an interest rate swap, two parties agree to exchange fixed interest payments. This is done against floating interest payments based on a notional principal amount. In a currency swap, they exchange cash flows in different currencies. It is often used to manage foreign exchange risk.

    Swaps are primarily used by large corporations and financial institutions. This is mainly for long-term risk management. There is no exchange of the underlying principal amount, but only the interest or currency payments agreed upon.

    Swaps require a high level of financial expertise and strong creditworthiness. So retailers usually do not trade in these.

    Pros of Swaps Contracts

    • Customizable terms based on specific needs
    • Helps manage interest rate or currency risks
    • Useful for long-term financial planning
    • No upfront cost in most cases
    • Flexible settlement structure

    Cons of Swaps Contracts

    • High counterparty risk
    • Lack of transparency and regulation
    • Not available for retail trading
    • Difficult to value and monitor
    • Requires deep financial knowledge

    Read Also: What is Swaps Derivatives?

    Key Participants in the Derivatives Market

    When it comes to derivatives, there are various people who trade in them. All of these people have different goals. This is why derivatives suit their portfolio. The most common participants in the derivatives market are as follows:

    1. Hedgers: They use derivatives for protection against price fluctuations. These are the traders who trade in variety of assets
    2. Speculators: These are the people who wish to gain from trades based on predictions. They perform price predictions based on trends. They accept higher risk in pursuit of higher returns.
    3. Arbitrageurs: The aim here is to take advantage of price differences in different markets. These people aim to earn risk-free profits through simultaneous buy and sell trades.
    4. Margin Traders: These use leverage to control large positions with small capital. While it boosts profit potential, it also increases risk.

    These participants keep the derivatives market efficient, balanced, and liquid. Also, each of these are playing a crucial role in price discovery and risk management.

    Read Also: Index Derivatives in India

    How to Trade in Derivatives

    When you are planning to trade in derivatives, there are certain steps to follow. The first thing is to have an account with the SEBI registered broker. Once you have that, here are the steps to know.

    1. Open an Account

    Register with a stockbroker who offers access to the derivatives segment. Ensure your account is enabled for F&O trading.

    2. Understand Margin Requirements

    Derivatives require you to maintain a margin. This is a percentage of the total contract value that must be paid upfront.

    3. Choose a Derivative Instrument

    Select between futures or options. It should be based on your risk appetite and strategy. If needed, seek expert guidance from your financial advisor.

    4. Analyse the Market

    Use technical analysis to predict price movements and manage risks effectively.

    5. Place Your Order

    Execute your trade through your broker’s trading platform. Monitor it closely and exit before or on expiry.

    Read Also: What is Derivative Trading? Types, Examples, Pros & Cons Explained

    Conclusion

    Derivatives are among the most effective instruments for traders looking to manage risk, capitalize on short-term price movements, and build advanced trading strategies. Success in derivatives trading depends on clearly defining your trading objectives, choosing the right contract type, and maintaining strict risk management. Staying disciplined, analyzing market trends, and adjusting positions in real time are crucial for consistent performance. It is advised to consult a financial advisor before trading in derivatives.

    Once you are ready, you can start your journey with Pocketful. It is a reliable and user-friendly platform that can help you while trading. So sign up today and get started.

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    Frequently Asked Questions (FAQs)

    1. What is the main purpose of trading in derivatives?

      The primary purpose is to hedge against price fluctuations and manage financial risk. It also helps to speculate on future price movements to earn profits without owning the underlying asset.

    2. Are derivatives suitable for all traders?

      No. Beginners should approach derivatives cautiously, ideally after gaining sufficient market knowledge or under expert guidance.

    3. What are the most common types of derivatives in India?

      The most common types include futures and options. These are traded on exchanges like NSE and BSE. Then there are forwards and swaps that are traded over-the-counter.

    4. How is profit or loss settled in derivatives?

      In exchange-traded derivatives, gains and losses are settled daily through a process called mark-to-market. Final settlement occurs at expiry if the position is held.

    5. Do I need a special account to trade in derivatives?

      Yes, you need a trading and demat account activated for the derivatives segment with a SEBI-registered broker to start trading in futures and options.

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