Basics of Futures &Options – Trading in Futures and Options
For the new traders to F&O (Futures and Options) markets, it is
advisable to get a handle on the most basic concepts of trading in futures and
options before they take up their first trade in the derivatives. On the
Internet, you can find lots of good stuff on the subject of F&O trading. On
this site, I have posted couple of articles about the basics of option trading.
Here is another article in which you will learn practical aspects of trading in
futures and options.
What is the general structure of brokerage?
Brokerage charges offered by brokers are highly negotiable depending upon
the turnover. As per my experience, the beginners can easily fetch brokerage
rate of around 0.05% (5 Paisa) per leg of transaction. After 3-4 months of
trading, depending upon the turnover, you can start negotiating for cheap
brokerage rates. If you know how to negotiate, getting a brokerage rate of
around 0.02% (2 Paisa) will be very easy. I have seen professional traders
paying as low as 0.005% (half paisa) brokerage on F&O transactions. Please
note that brokerage in F&O, Intra-Day transactions in cash segment
(transactions that are squared off on the same day) and commodities trading are
generally same.
How the brokerage is charged?
Futures: Generally, the brokerage is charged per leg, that
is, charged separately for buy and sell both the transactions. Many brokers
charge brokerage only on the buy side or sell side, whichever is higher.
However, in such cases, the brokerage rate will be generally higher. Some of
the brokers may charge you less brokerage on the second leg if you square off
the transaction on the same day. Let’s see a simple example on how to calculate
brokerage.
Assume a brokerage rate of 0.05%, which is chargeable on both the legs
(sides).
Transaction amount on buy side = 4955 x 20 = 99100 and Brokerage = 0.05% of
99100 = 49.55
Transaction amount on sell side = 4985 x 20 = 99700 and Brokerage = 0.05% of
99700 = 49.85
Total brokerage = 49.55 + 49.85 = 99.40
Please note that besides the brokerage, you have to pay service tax and
education cess @ 10.3% on the brokerage and therefore, the net brokerage works
out to 109.65. Moreover, you have to pay STT @ 0.017% on the transaction
amount, on the sell side (on 99700), that is, 16.95 and other charges such as
transaction charges and stamp duty. STT on options is a tricky matter. You can
read my other articles to get a practical idea about STT on options contracts
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