Mastering Derivatives: Trading Newly Introduced Contracts

NSE continually revises the list of stocks on which futures and options are offered, based on the guidelines provided by SEBI. Recently, NSE added Nuvama Wealth and Suzlon Energy to the list and removed some including Birlasoft and Chambal Fertilizers. This week, we discuss the factors that should be considered when a new underlying is introduced in the futures and options (F&O) segment.

Futures Vs options

It is difficult to trade a newly listed stock in the spot market based on technical analysis if you are a position trader. This is because you will not have enough data to analyse price trends on the chart. Is there a similar issue when an underlying is introduced in the F&O segment? Not necessarily.

A stock must have traded for at least six months to apply the average daily delivery value rule to validate an underlying’s entry in the F&O segment. But a stock can be introduced in the F&O segment within one year of listing. Analysing trend on a daily chart based on data that is one year or less may be an issue. Fortunately, you can trade futures on an underlying that has just been introduced in the F&O segment if it has a longer price history in the spot market. Why? Futures price moves one-to-one with the underlying. Therefore, while it is preferable to use futures chart to analyse trends, you can set up an appropriate position by observing trends from the underlying price chart. 

That said, trading options may require a different strategy. Options cannot move one-to-one with the underlying because of time decay or theta. Also, you can use continuous price chart for futures by stitching together all one-month contract over time. That logic cannot work for options because the location of the strike in relation to the underlying price determines the moneyness of the option. For instance, 24200 strike may have been in-the-money last month but out-of-the-money this month, and the option price is determined by its moneyness. Finally, you must consider option’s implied volatility to initiate positions. This is the volatility that is implied in the option price for a strike, given the spot price, time to expiry and risk-free rate. Implied volatility is important because higher (lower) implied volatility compared to the past indicates that an option is rich (cheap). When an underlying is introduced in the F&O segment, you will not have past implied volatility trends. So, initiating call or put positions could pose an issue. 

Optional reading

You can set up volatility arbitrage trades for a given expiry. This involves going long on a strike with lower implied volatility and short on a strike with higher implied volatility for the same expiry. You only need to observe the relative implied volatility at the time of initiating the position, not how it was in the past. You must also analyse the overall trend from the underlying price (futures) chart for trading equity (index) options.

(The author offers training programmes for individuals to manage their personal investments)

Published on August 16, 2025