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C. Raja Rajeshwari

In your column dated January 31, 2004, you have explained, "if the open interest in Reliance is 200 contracts, it means that there are 200 long positions and 200 short positions that have not been closed". Would you explain what is long position and short position? — Jimmy George

Long positions are buy positions on the underlying asset. A long position in a future or option contract means that you are ready to purchase the underlying stock in the specified quantity at the specified price on a future date. If you have a bullish view on the underlying, you can take a long position. If the price trend conforms to your expectation, you will be able sell the future at a higher price. The profit that you make would be the difference between the price at which you bought the contract and the price at which you sold the contract.

Short positions means sell position on the underlying. A short position would mean that you have a bearish view on the underlying stock. You may be able close it at a future date by buying at a lower price.

* * If your objective is to take delivery of the underlying, a futures contract cannot be used as it is cash-settled in the Indian markets. You can, however, use it for speculating or protecting your exposures in the cash market.

* * If you already own the underlying stock and you want to hedge your position, you can short the futures of that underlying.

If the stock price moves up, the cash market exposure would ensure a profit. If the stock declines, the short position in the futures contract would make profit.

* * If the spot price of the underlying runs counter to your expected view, the loss in both these situations would be unlimited.

How do you rollover futures/options contracts? What are the procedures involved? — R. Ganesan

Rollover means closing out the position in the current-month futures contract and taking a fresh position on the next-month futures contracts. For instance, if you have a long position (buy) in February Reliance futures, you can roll it over by closing it out with a short position and simultaneously taking a new position in the March contract.

Rollover of contracts is used only with futures. This is because a position in the futures market can be taken without a significant outlay upfront. Options cannot be rolled over as for every contract you pay a premium that is retained by the option seller.

In futures, only margins have to fork out and if the spot price moves in line with you expectation, this sum would be returned to you when you close out the position.

For instance, assume there is a 40 per cent margin. You have a long position on the February contract. When you roll it over by taking a short position on the February contract and simultaneously, a long position on the March contract, the margin requirement would remain unchanged. Option contracts cannot be rolled in this manner. You exercise an option if it is in-the-money; if it were out-of-money, it would expire worthless. You take fresh positions in the March options, which would involve an outflow by way of premium.

If you have any queries relating to the futures/options please mail them to Futures & Options, Kasturi & sons, 859-860, Anna Salai, Chennai 600 002 or email them to fno@thehindu.co.in with a mention of futures/options in the subject line of the mail.

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