Introduction to Equity Derivatives (Futures &

Options)
Course Objective

The objective of this course is to offer a comprehensive foundation in equity derivatives, specifically
focusing on futures and options. Designed for beginners with no prior knowledge, the course aims to
demystify key concepts, practical applications, trading processes, and real-world uses of these financial
instruments. By the end of this course, learners will understand the theory behind derivatives, calculate
profit and loss, and identify scenarios for strategic application in the financial markets.

Detailed Course Structure

Module 1: Introduction to Equity Derivatives

1.1 What are Derivatives?

• A derivative is a financial contract whose value is derived from an underlying asset such as stocks,
commodities, or indices.

• Main types of derivatives: Forwards, Futures, Options, Swaps.

• Derivatives serve several purposes, including risk management (hedging), speculation, and
arbitrage.

1.2 Equity Derivatives: Scope and Use Cases

• Equity derivatives are contracts based on individual shares or stock indices.

• Commonly used for hedging against market movements and leveraging positions with less capital
outlay.

1.3 Participants in Derivatives Markets

• Hedgers: Use derivatives to minimize risk from price fluctuations.

• Speculators: Seek to profit from predicting market movements.

• Arbitrageurs: Exploit price differences in different markets for risk-free profit.

2.1 Concepts of Futures Contracts

• Futures are standardized agreements to buy or sell an asset at a future date and a predetermined
price.

• Key features: Lot size, expiry date, settlement process.

2.2 How Equity Futures Work

• Traded on exchanges; transactions take place through brokers.

• Orders can be placed as market orders (executed at current price) or limit orders (executed at a
specified price).

2.3 Margins and Mark-to-Market

• Initial margin: Deposit required to enter a futures contract.

• Maintenance margin: Minimum amount to keep the position open.

• Mark-to-market: Daily adjustment of margin based on closing prices; can result in margin calls if
losses accrue.

2.4 Profit and Loss Calculations

• Long futures: Profit when price rises above the contract price; loss when it falls below.

• Short futures: Profit when price falls below the contract price; loss when it rises above.

• P&L = (Settlement price – Purchase price) × Lot size (for long position).

2.5 Use Cases

• Hedging: Lock in purchase or sale prices.

• Leveraged trading: Control larger positions with smaller capital.

3.1 Concepts of Options Contracts

• Call Option: Right to buy an asset at a certain price by a specific date.

• Put Option: Right to sell an asset at a certain price by a specific date.

• Key terms: Strike price, premium, expiry, in-the-money (ITM), out-of-the-money (OTM), at-
the-money (ATM).

3.2 Payoff Diagrams for Calls and Puts

• Graphical depiction of profit and loss at expiry for buyers and sellers of options.

• Long call/put: Limited loss (premium paid), potentially unlimited gain.

• Short call/put: Limited gain (premium received), potentially large losses (especially for uncovered
positions).

3.3 Option Styles: American vs European

• American options: Exercisable any time before expiration.

• European options: Exercisable only at expiration.

3.4 Moneyness Explained

• Describes the relationship between the spot price and strike price.

• In-the-money (ITM): Option has intrinsic value.

• At-the-money (ATM): Spot price equals strike price.

• Out-of-the-money (OTM): Option has no intrinsic value.

3.5 Profit and Loss Calculations

• For calls and puts, P&L depends on the premium, strike price, and market price at expiry.

• Break-even point: The market price at which P&L is zero. Example: For long call = strike price +
premium.
Module 4: Option Pricing & Greeks

4.1 Intrinsic vs. Extrinsic Value

• Intrinsic value: Immediate exercise value (positive difference between spot price and strike, if
any).

• Extrinsic value: Time value until expiry, depending on volatility and time left.

4.2 Factors Affecting Option Premiums

• Stock price, strike price, time to expiration, volatility, interest rates, and dividends.

4.3 Introduction to Option Greeks

• Delta: Change in option price for a small change in the underlying asset's price.

• Gamma: Rate of change of delta.

• Theta: Time decay, or loss in option value as expiry nears.

• Vega: Sensitivity to volatility of the underlying asset.

• Rho: Sensitivity to changes in interest rates.

4.4 Impact of Time Decay and Volatility

• Options lose value as time passes (theta decay).

• Increased volatility usually raises option premiums due to higher risk of large price moves.
Module 5: Strategies Using Futures & Options

5.1 Basic Futures Strategies

• Hedging: Lock in purchase/sale price to avoid adverse price moves.

• Speculation: Take leveraged bets on price direction.

• Arbitrage: Exploit price discrepancies between related markets.

5.2 Basic Options Strategies

• Protective put: Buy a put to protect against downside in stocks.

• Covered call: Sell a call against owned stock for additional income.

• Straddle: Buy both a call and put at the same strike to profit from large moves either way.

• Strangle: Buy out-of-the-money call and put—cheaper but requires a larger move for profit.

5.3 Profit & Loss Profiles of Strategies

• Visual representations and analysis of how payoffs work for each strategy under different price
scenarios.

Module 6: Trading Process, Settlement, and Regulations

6.1 Trading Equity Derivatives in Practice

• Account opening, KYC, and margin requirements with brokers.

• Placing and managing orders; modifying or cancelling trades before execution.

6.2 Settlement & Expiry Process

• Cash settlement: Only the difference in value is transferred, no actual delivery of the asset.

• Physical settlement: Actual delivery of shares on contract expiry (less common in many equity
derivatives).

6.3 Regulatory Framework

• Role of securities exchanges and clearing corporations.

• Key regulations: position limits, margin policies, disclosure norms for market participants.
Module 7: Practical Case Studies & Applications

7.1 Real-Life Hedging Examples

• An investor owning shares buys puts as insurance against price drops.

• A farmer using futures contracts to lock in crop prices.

7.2 Speculative Trades in Market Volatility

• Buying options before major news events to capitalize on expected price swings.

7.3 Simple Arbitrage Opportunities

• Simultaneous buying and selling in different markets to exploit price gaps.

7.4 Exercises: Calculating Payoffs and Break-even Points

• Example scenarios to practice calculating profit/loss for various positions.

• Worksheets for students to reinforce theoretical knowledge with practical calculations.