What is the game named F&O?

 Friends,

We need to understand how F&O works. It is hard for a simple investor to understand these dynamics .That is the reason I have picked up this topic.

F&O is a comlex game.Understanding it is hard and easy both.Easy in the way once you know what is happening you stay away from it.Hard in the way that how players plays it very hard to understand.

Remember one thing in market. Lay investor is a very small player.Very small, I can call him a tiny player.He wants to make money quickly and wants to become a millioner as soon as possible.That is never possible in F&O.

The simple things a small investor do is buying either a future or sell a future or either buy a call Options or buy a Put Options.How many Futures or Options a small investor can buy? Maximum one , two or three or maybe five.Now does that makes sense where the F&O Vol is in billions of rupees? No.

So let us now understand what is F&O.There are big players who writes Futures and Options.They are real BIG players.They have access what is going to happen tomorrow.They have inside information or they have access to international market what is going to happen in night when India will sleep and west will be doing business and that effect we are going to see the next morning.These people have prior information about what will be coming up internationally and domestically and likewise they play the cards.

It is obvious that whatever a small player will buy in F&O has no effect on market because the stake is not high. One thing one need to understand here is until someone do not sell one cannot buy.Either it is stock in delivary or F&O.So someone is writing F&O and that too in BIG way. Who are they? These are Big players like FII’s or Big players like RJ, RD, NS etc.

If FII’s are writing the F&O then they have access to the world market and accordingly they write F&O. Like say they know that tomorrow the Int market is going to go in tail spin and hence they wrote more call options and futures and in the morning market tanks by 200 points in sensex and 70 -80 points in Nifty.That’s it.That is what they need.They square off their position in first hr of trade.It is not possible that they can square off whole trade they have written but even 70% trade is squared off  they can sell rest at loss and still make huge profit as the Vol is huge for them.

Let me give you an example in Indian Context.

Suppose Rakesh Jhunjhunwala is holding some 40-50lacs shares in Orchid Chemical Ltd.He feels that as the sentiment is bad now and even after the good results the stock will come down by say 50-60 rupees  and so he decides to sell Orchid Chem delivary of 20 lacs shares in delivary.So he has decided that he will be selling Orchid Chem 20 lacs shares. Now it is not possible for him to sell all 20 lacs shares in market at same price as when such a huge delivary comes in market , there needs to be a Buyer at same price to absorb all selling but that never happens.So he knows it very well that he will have to sell below the close price of yesterday.So what he will do to makeup that loss?He will write call Options or sell futures and the trade gets reversed in the hand of lay investor.

Understand the trade. RJ is writing Put Options which becomes Call options in hand of lay investors. Like I said, someone needs to sell something for someone to buy and hence there is one seller and there is one buyer. Seller feels that stock will go down and buyer feels that stock will go up. So one is bearish and one is bullish. Now the bearishness can be of any nature.He is Partially booking profit or wants to sell because he feels that the stock is fully valued. So here someone is selling put options and some is buying Call Options.So when the price of Orchid Chem tanks, the Call Options premium get lesser and lesser and investor starts selling seeing the price of premium going down and at the end of the months the premium become ZERO and so will be the case in Futures and investors lose money by losing the amt they paid for premium in Call Options or premium for buying futures of that stock.

So in this case that we have taken as an example, as RJ has already decided to sell 20 lacs shares of Orchid Chem and he knows it that price is going to go down he write call options  and sell Futures in huge quantity and makes money there as well and makeup the loss in price difference what he sells in delivary.
Same thing happens when he or FII’s are going to buy something.What they will do is first they will make a position in buying Futures and buying Call Options .They will place buy orders for F&O in  huge quantity  then after some days they will place a BUY orders for that stock in delivary and the price will automatically go up and they will make killing in call Options and in Futures as the premium will go up in F&O.

One can see from the above example that it is hard to win in F&O and that is why I write always, “Don’t Play in F&O”……….It is not our cup of tea.Stay away from F&O.People have lost everything playing in F&O and when one make a loss then he will try to make it up playing the same thing.That is human nature.He tries to make up the loss while trying same thing and he keeps dreaming that one day he will make up all the loss and that day never comes....

I have tried my level best to explain the game named F&O is played giving examples.I hope readers will understand these and act accordingly.Many readers has written me that the manner in which I explain here is a rare to see somewhere else.I explain it in a very simple way where anyone can understand it.Be it a stock, or any other parametres.I hope this time also readers will understand it very easily.......