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What is Future and Option ?
Futures and options are two major types of derivatives trading in the share market. These contracts allow traders to buy or sell assets at a predetermined price at a later date. This guide will explore the basics of futures and options, their differences, types, and who should consider investing in them.
Definition and Purpose: Futures contracts are agreements to buy or sell an underlying asset at a predetermined price and date.
Hedging Risks: Futures contracts help traders hedge against market risks by locking prices in advance.
Market Movements: Profits or losses in futures trading depend on accurate market predictions.
Definition and Purpose: Options contracts give individuals the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and date.
Call Options: Call options allow the buyer to purchase the asset in the future at a specified price.
Put Options: Put options enable the buyer to sell the asset in the future at a predetermined price.
In futures trading, buyers and sellers enter into a contractual agreement to buy or sell an underlying asset at a predetermined price and future date. The futures contract obligates both parties to fulfil the transaction upon expiration.
Options trading involves the buying or selling of options contracts. Call options give the holder the right to buy the underlying asset. In contrast, put options give the holder the right to sell the underlying asset at a predetermined price within a specific period.
Some advantages include potential higher returns due to leverage, the ability to profit from rising and falling markets, portfolio diversification, and risk management through hedging strategies.
Obligations and Rights: Futures contracts impose obligations on traders to fulfil the contract, while options contracts provide the right, but not the obligation, to do so.
Risk and Reward: Futures and options trading offer potential profits based on market movements. Futures trading involves unlimited profit potential and risk, while options trading limits the maximum loss to the premium paid and offers unlimited profit potential.
Flexibility: Options provide more flexibility as traders have the choice to exercise the option or not, based on market conditions and investment objectives. Both parties must fulfil futures contracts unless offset by an opposing position.
Liquidity: Futures contracts have higher liquidity than options contracts due to standardisation and trading on organised exchanges.
Initial Investment: Options require a smaller initial investment (premium), while futures contracts may require a margin amount, representing a fraction of the total contract value.
Index Futures: Index futures are futures contracts based on an underlying stock market index, such as the Nifty 50 or the Sensex. These futures allow investors to speculate on the direction of the overall market.
Stock Futures: Stock futures are futures contracts based on individual stocks listed on the Indian stock exchanges. They allow investors to take positions on the future price movements of specific stocks.
Index Options: Index options are options contracts based on stock market indices. They provide the right, but not the obligation, to buy or sell an underlying index at a predetermined price.
Stock Options: Stock options are options contracts based on individual stocks. They provide the right, but not the obligation, to buy or sell the underlying stock at a predetermined price.
Futures and Options trading involves inherent risks and may not be suitable for all traders. It requires a good understanding of the market, risk tolerance, and disciplined trading practices. It is advisable to seek professional advice before engaging in such trading activities.
Traders: Experienced individuals well-versed in stock market operations often participate in futures and options trading to manage investment volatility and potentially gain from price movements.
Hedgers: Hedgers aim to secure gains or expenditures in the future by entering into derivative contracts, helping them mitigate risks associated with trading.
Speculators: Speculators predict price movements and take positions in the derivatives market to profit from such fluctuations.
Arbitrageurs: Arbitrageurs aim to profit from price differences in the market, balancing demand and supply patterns.
You must open an account with our online trading platform to start. Once your account is activated, you can access real-time market data, research tools, and educational resources to help you make informed trading decisions.
