Future are great hedging tools, not just for large investors, but for active retail ones

Getting Derivatives To Work For You

You've probably heard of derivatives. Chances are, you've dismissed them-derivatives are of two types, futures (a contract to sell a certain stock at a certain date in the future at a specified price) and options (the option to buy or sell a stock at a certain price at a certain date in the future)-as being too complex for individual investors.

However, as Satish Menon, the Chief Operating Officer of Geojit Securities, explains, futures (and, for that matter, options) are great hedging tools. Let us assume you invest Rs 200,000 in stocks in Year 1. In Year 2, the market booms and the value of your portfolio increases to Rs 400,000. But things look volatile and you wish to protect your gain. You can do this by selling Nifty Futures. If the market falls, the gains from this-remember, you sold when the market was still booming-will offset the losses on your portfolio. However, if the market continues to boom, you will not gain anything.

A put (right to sell) option will do one better: ensure that your losses are covered in case the market falls; and, in case the market rises, you can decide not to sell after all, and keep your portfolio gains. You will only be poorer by the premium you pay when you buy an option. Which is why Manish Shah, Head (Retail Products & Strategy), Motilal Oswal Securities, terms options "an handy instrument in volatile times".

Finally, derivatives may provide some indication of where the market is headed. For instance, in a bull market, futures will be priced higher than current values of stocks. And the premium on call (the right to buy) options, higher than those on put options. It isn't perfect but beats reading tea leaves any day.

-Narendra Nathan

Maybe you'll make money, maybe you won't; but the lure is irresistible

The day-trading myth

It's a myth as old as the markets themselves. Faceless men, with little or no capital making millions sitting in front of flickering monitors, just through quick reflexes and sheer luck. Volatile stockmarkets-basically day traders profit by exploiting small price imperfections in shares-are only helping the myth grow stronger. Day trading and day traders account for over Rs 4, 000 crore or 80 per cent of the combined volumes of the two premier bourses. "My trading rooms have never been so crowded; we've even had to bring in extra chairs," says Hasit Pandya, Director, Twin-Earth Securities, a Mumbai-based brokerage house. It isn't just happening at Twin-Earth; hundreds of day traders are crowding brokerages across the country drawn by the comfort (and ease) of beginning each day with a clean slate. No messy deliveries, no portfolio planning strategies, just a tidy profit at the end of three hundred and thirty five minutes of frenzied trading. But before you chuck up your boring job, listen to what Amit Mehta (name changed) has to say. Two years ago, the now 37-year-old was a full time day trader. With an investment of a few thousand rupees, the MBA (in finance) was convinced he would strike gold. "It's not at all as easy as it looks. Shares have become very volatile and unless your calls are sound, you could lose a lot in just a few seconds," he warns. Mehta quit after a year and says he failed because of a stagnant bear market. Today, he prefers to work at a financial services firm, advising budding day traders!

-Abir Pal