Sunday, May 22, 2011

What is the game named F&O?


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.......


  1. Respected Rajiv Desai ji,
    A really precious article and gained good knowledge. I request you to keep on such work for the benefit of small investors like us who understand the game when things completely go out of hand.I sincerely appreciate your hard work and collection and above all the spirit to create awareness among new investors.

  2. Hi Vandana,
    This is a tip of an iceberg.What I have written is nothing.The game is much much bigger and complex then anyone can understand.
    Samajne ne wale ko ishara kafi hai.....bas ismain sab samj

  3. Yes Rajeev.
    You are absolutely true.
    WB calls derivatives as WEAPONS OF MASS (Financial) DESTRUCTION
    With Regards,

  4. Rajeev ji
    U are always teach us like a teacher.i paste here 1 article which i see in my email.
    How often have you heard an investor say: "I don't
    have to worry about fluctuations or margin calls. I never
    speculate. When I buy stocks, I buy them for an
    investment, and if they go down, eventually they will
    come back."
    But unhappily for such investors many stocks bought
    at a time when they were deemed good investments have
    later met with drastically changed conditions. Hence
    such so-called "investment stocks" frequently become
    purely speculative. Some go out of existence altogether.
    The original "investment" evaporates into thin air along
    with the capital of the investor. This occurrence is due to
    the failure to realize that so-called "investments" may be
    called upon in the future to face a new set of conditions
    which would jeopardize the earning capacity of the
    stock, originally bought for a permanent investment.
    Before the investor learns of this changed situation, the
    value of his investment is already greatly depreciated.
    Therefore the investor must guard his capital account
    just as the successful speculator does in his speculative
    ventures. If this were done, those who like to call
    themselves "investors" would not be forced to become
    unwilling speculators of the future—nor would trust
    fund accounts depreciate so much in their value.
    You will recall not so many years ago it was
    considered safer to have your money invested in the
    New York, New Haven & Hartford Railroad
    than to have it in a bank. On April 28, 1902, New Haven
    was selling at $255 a share. In Dceember of 1906,
    Chicago, Milwaukee & St. Paul sold at $199.62. In
    January of that same year Chicago Northwestern sold at
    $240 a share. On February 9 of that year Great Northern
    Railway sold at $348 a share. All were paying good
    Look at those "investments" today: On January 2,
    1940, they were quoted at the following prices: New
    York, New Haven & Hartford Railroad $0.50 per share;
    Chicago Northwestern at 5/16, which is about $0.31 per
    share; Great Northern Railway at $26.62% per share. On
    January 2, 1940, there was no quotation for Chicago,
    Milwaukee & St. Paul— but on January 5, 1940, it was
    quoted at $0.25 per share.
    It would be simple to run down the list of hundreds of
    stocks which, in my time, have been considered giltedged
    investments, and which today arc worth little or
    nothing. Thus, great investments tumble, and with them
    the fortunes of so-called conservative investors in the
    continuous distribution of wealth.
    Speculators in stock markets have lost money.
    But I believe it is a safe statement that the money lost by
    speeulation alone is small eompared with the gigantie
    sums lost by so-called investors who have let their
    investments ride.
    From my viewpoint, the investors are the big
    gamblers. They make a bet, stay with it, and if it goes
    wrong, they lose it all. The speeulator might buy at the
    same time. But if he is an intelligent speeulator, he will
    reeognize—if he keeps reeords— the danger signal
    warning him all is not well. He will, by aeting promptly,
    hold his losses to a minimum and await a more favorable
    opportunity to reenter the market.
    When a stoek starts sliding downward, no one ean tell
    how far it will go. Nor ean anyone guess the ultimate top
    on a stoek in a broad upward movement.

  5. Dear Ashok,
    After reading your post, I can only say that sell 50% as soon as the stock doubles and take out the money invested.That is the best way not to lose money...
    Another thing to note is,one needs to be always on toes to keep track on what is happening where you have invested like say, whether promoters are having same stake,how Co is faring on sales front, whether the price rise will affect the bottomline etc etc...
    There are always examples for stocks becoming zero but there are stocks which gave 100 times returns as people who favours F&O speaks about failed stocks and those who invest on fundamentals speaks about successful calls.
    That was the reason I wrote on Keilidoscope Film which was just 38 paisa in 2005 and now it is Rs 42......have anyone has any ewxplaination about it?
    Ashok, read everything but decide what is good for you.....that is the bottomline...

  6. Dear sirji

    now a days lots of people have taken a fancy on nifty trades ,whats your take and comment if any

  7. Hi fundainvest,
    I have written in length why one should not trade in F&O.Be it nifty trade or anything else....