Futures and options are derivative contracts that derive value from an underlying asset such as stocks, crude oil, agri commodities, index, natural gas, silver, gold and currencies. In future and option contracts of BSE Sensex, the underlying asset is the Sensex index.
In this article, you will learn how future and option contracts of BSE Sensex are traded in the Indian stock market. Before that lets understand what Sensex is.
What is sensex?
In India we have two major stock exchanges: NSE and BSE.
BSE is the oldest and one of the largest stock exchanges in India. Sensex is the index of BSE comprising 30 large cap stocks.
Along with nifty 50, BSE’s sensex is considered as the industry benchmark for the Indian stock market. It tracks the performance of the overall stock market to tell you how the market has performed on a daily, monthly or periodical basis.
Sensex is an acronym which stands for Stock Exchange Sensitivity Index.
Here is the list of 30 stocks that constitute the BSE Sensex index;
| ASIAN PAINTS | AXIS BANK | BAJAJ FINANCE |
| BAJAJ FINSERV | BHARTI AIRTEL | HCL TECHNOLOGIES |
| HDFC BANK | HUL | ICICI BANK |
| INDUSIND BANK | INFOSYS | ITC |
| JSW STEEL | KOTAK MAHINDRA BANK | L&T |
| M&M | MARUTI SUZUKI | NESTLE |
| NTPC | POWER GRID | RELIANCE IND |
| SBI | SUN PHARMA | TATA MOTORS |
| TATA STEEL | TCS | TECH MAHINDRA |
| TITAN | ULTRATECH CEMENT | WIPRO |
Futures and options segment of BSE comprises derivative products linked to sensex and Bankex as their underlying assets.
Similar to Sensex, we have nifty futures and options which are traded in NSE.
BSE Sensex Futures
Sensex futures contracts allow market participants to trade on the movements of BSE Sensex instead of buying and selling all the 30 stocks that constitute the index.
Lot size for future contracts of sensex is 10. Which means traders can trade with a lower capital.
If BSE Sensex is at 72,240, then the contract value of one lot will be 7,22,400.
Sensex futures has 7 weekly and 3 monthly contracts.
Sensex weekly future contracts will expire on Friday of the week. Similarly, monthly contracts will expire last Friday of each contract maturity month.
Future contracts of Sensex are cash settled based on the closing price of the BSE Sensex on the date of expiry.
BSE Sensex Options
Options are a type of derivative contracts whose value is derived from an underlying asset. In this case, BSE Sensex option contracts derive value from the Sensex Index.
We have two types of options: call and put.
In a call option, the buyer has the right, but not the obligation to buy the underlying asset. Which means the buyer can exercise his or her right, not forced to do so.
In a put option, the buyer has the right, but not the obligation to sell the underlying asset. In this case, the seller can exercise his or her right, but can’t be forced to do so.
In index futures and options, contracts are cash settled instead of delivering physical stocks of the underlying companies in the index.
Which means, if a buyer has exercised his or her rights on a contract of BSE Sensex, then he or she will be settled in cash instead of giving physical delivery of 30 stocks which constitute the BSE Sensex.
BSE Sensex comes with 7 weekly, 3 monthly, 3 quarterly and 8 semi-annually contracts.
All these Sensex options are european style.
Lot size for option contracts of sensex is 10.
Expiry date for BSE Sensex option monthly contracts is last Friday of each contract maturity month. For weekly contracts, Friday of the week will be the date of expiry.
If expiry day is a trading holiday, then the immediately preceding business day is considered as expiry date.
Similar to BSE Bankex, Trading hours for both future and option contracts of BSE Sensex is 09:15 AM to 03.30 PM.
Can anyone invest in BSE Sensex?
BSE sensex consists of 30 large cap companies. Based on market cap of these companies, they have different weightage in Sensex. We have many mutual funds and portfolio managers created funds to invest exactly in the same weightage of Sensex. In other words, they have copied the BSE Sensex to generate the same return that BSE Sensex index gives every year.
If any stock goes out or comes into BSE Sensex, then similar adjustments are done to copy it.
To generate the same return that BSE Sensex generates, many investors prefer to invest in 30 listed companies which are part of BSE Sensex in the same weightage. The best way to invest is through an index fund which copies the SENSEX.
As we all know, market risk is inherent. Due to market volatility, prices can move in your favour or against you. Due to this volatility, you may incur profit or suffer losses.
Therefore, experts suggest diversification as a key to reduce the risk of the share market.
If you are in the market for a while or just started out trading in stock market products such as futures, options, stocks and commodities or any other financial market linked products, then our suggestion is to have in-depth knowledge on the subject and learn how to manage your risk before trading or investing in the stock market.
We also suggest you learn fundamental analysis, technical analysis, candlesticks, price patterns and different trading styles followed by market participants.
After a thorough knowledge on the subject, look for the trading style that suits you the most. We have many trading styles such as swing trading, Day Trading, Buy Today Sell Tomorrow (BTST), scalping and positional trading.
We request you to take professional guidance from a SEBI approved research analyst, investment advisor and financial professional before getting into the stock market.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
