- What are STIR Futures & Options: Definition, Price Quotation & Example
- Cost-of-Carry: Definition, Carry Model & Example
- What is Managed Futures Account: Definition, Advantages & Example
- What is an Outright Futures Position: Definition, Advantages, & Example
- What is a Futures Commission Merchant - Role, Obligations & Responsibilities
- Gold Futures
- What is the Fed Fund?
- What is Futures Spread
- What are shout options?
- What is a Short combination?
- What are currency derivatives?
- What are Long-dated Options?
- What are Swap Derivatives?
- What Is a Multi-Leg Options Order?
- Copper Futures
- Receiver Swaptions
- Tips for Getting Into Futures Trading
- What are market indicators?
- What is Margin Money?
- What is Short Covering?
- All About Commodity Options
- Futures and Options
- What is a Diagonal Spread and How does it work
- What is Credit Spread Strategies
- What is Box Spread trading Strategy
- What is Eurex? Understand Here!
- How are options settled?
- What are Naked Options?
- What is Option Premium
- What is Long Combo Option Trading Strategy
- What is a Cash Settlement?
- What are Oil futures
- What are Forex Options?
- What are Exchange Traded Derivatives?
- What are Equity Derivatives?
- What is Quadruple Witching
- What is Zero-Cost Collar Strategy
- What are Weekly Options?
- Synthetic Options Spread
- What are Commodity Options?
- What is Hedging with Futures?
- What is a Protective Put?
- What is call writing?
- What are Bermuda Options
- Put Writing Strategies
- What Is Call Option?
- What are Collateralized Debt Obligations?
- What is Derivative Trading?
- Options Trading Strategies: Vertical Spreads and Synthetic option spreads
- What is a fiduciary call? Understand here
- Short Put Ladder Options Strategy
- Long Call Condor Option Strategy
- Long Call Ladder Options Strategy
- Short Call Condor Options Strategy
- Short Call Ladder Options Strategy
- What are cash secured puts?
- How to Use LEAPS for Covered Call writing
- How to Calculate F&O Turnover
- Why futures prices converge upon spot prices
- What is E-mini futures
- Seagull Options
- What is Put Ratio Spread
- What is a hedging strategy?
- What is a bond option?
- What are bond futures?
- What is a derivative?
- What are commodity futures?
- Options arbitrage strategies
- What is a call ratio backspread option strategy
- Difference between warrants and calls
- What is a Short Put Butterfly option strategy
- What are over the counter (OTC) options
- How are futures prices determined
- Top 10 Mistakes when trading cheap options and how to avoid them
- How to be a successful options trader?
- What is cross currency swap
- What is expiration time in options trading?
- What is options trading?
- What are Index Futures?
- What is LTP in the Share Market?
- What is a Strike Price?
- What is Spot Price?
- What is an Underlying Asset?
- What is a Forward Contract?
- What is futures trading?
- Benefits of trading in futures
- Show all articles
What is Spot Price?
A spot price in the share market refers to the current market price (CMP) of a security. It is dependent on the market forces of demand and supply as well the fundamentals of the company.
Basics of spot price
The trend formed by the spot price reflects market participant behavior. It varies every time the trade is transacted and is dependent on the number of buyers and sellers at a particular price point. The buyer puts up bids along with the quantity of shares to be bought, this is known as “bid quantity”, and sellers line up to sell the shares, this is referred to as “ask quantity”.
When there are more buyers, the bid quantity would also inflate, leading to more demand for underlying security and thus pushing up the spot price. Similarly, more sellers lining up to sell would lead to an accumulation of underlying security available to be sold. The increased availability of underlying security will outstrip the demand leading to lowering of prices.
|Spot price||Traded volume||
Mild bullish with caution
Mild bearish with caution
How is spot price calculated?
The spot price refers to the price of a security in the spot market or cash market. A spot market or cash market is where the trades are transacted for the actual underlying security. The spot price reflects the true market price of the underlying asset and is the most essential component for determining the price of derivatives. This remains true for all instruments irrespective of the nature of asset viz; shares, currencies or commodities.
Spot price is also a function of the number of buyers and sellers interested in trading in a particular security, commonly referred to as market depth.
Note: Spot (market) price of Reliance Industries
Spot price and futures price
Spot price is not to be mistaken with the futures price, as it refers to the price of the futures contracts in the derivative market. A derivative market is where the market participants buy and sell contracts for settlement on a predetermined date. It is often referred to as the F&O (futures & options) segment.
Difference between spot market and futures market
Here are a few key differences between spot and futures trading:
|Purpose||Price discovery, change of ownership, speculation||
Speculation, hedging, Portfolio building
Corporate Actions Benefits
No, contract holder
|Any time frame||
Till contract expiry
|T + 2 days||
T + 1 day, from squaring off of position or expiry
|Short selling||Intraday; mandatory square off during the trading session||Position can be carried till the expiry of contract|
It is observed that there is a variance in the spot price and future price of the corresponding underlying security. This difference is known as the basis.
Basis = Futures price - Spot price
What does spot price mean for Investors?
Let's understand how spot and futures prices work and what it means for an investor with the help of an example.
If RIL shares are currently trading (spot price) at ₹2,500 and RIL futures are trading (futures price) at ₹2,505.
Basis = Futures price - Spot price = ₹2,505 - ₹2,500 = ₹5.
Here, spot price is less than futures price i.e. futures price > spot price.
As RIL futures are trading higher than the RIL spot, the RIL futures are said to be trading at “contango". When the basis is positive, it's referred to as “premium”. Both contango and premium are used interchangeably and have the same inference and meaning.
If RIL shares are currently trading (spot price) at ₹2,450 and RIL futures are trading (futures price) at ₹2,447.
Basis = futures price - spot price = ₹2,447 - ₹2,450 = - ₹3.
Here, futures price is less than spot price i.e. futures price < spot price.
As RIL futures are trading lower than the RIL spot, this is called “backwardation”. Also, when the basis is negative, it’s referred to as “discount”.
Spot price and Arbitrage
The change in the amount of premium or discount, i.e. basis, results in arbitrage trade opportunities. Arbitrage arises from a price differential between spot and futures. Such differences only last for a few minutes as traders take advantage of opportunities and close the gap in differential prices. Arbitrage by nature is risk-free, and therefore trading opportunities if any would last for a very short time. At the expiry of the contract, the futures price will always converge on the spot price, irrespective of premium or discount on the underlying security.
As seen in the above example, the basis or the spread between underlying security price and the corresponding derivative can be positive, negative or zero. The difference between the futures and spot prices is generally positive, i.e. futures are always at a premium. This is on account of cost of carry (or CoC). The cost of carry generally implies the opportunity cost of the margin deployed.
What is spot price in options?
Moneyness of options
Strike price < spot price
|In the money||Strike price > spot price|
Strike price = spot price
|At the money||
Strike price = spot price
|Strike price > spot price||Out of the money||
Strike price < spot price