While futures and options are both popular derivative products in their own right, the term "future options" may be unfamiliar to many. So let us break this down for you and explain what it all means.
You will be granted the right to buy or sell a futures contract at a specific price on a defined date if you purchase this option. Purchasing or selling a future option trading contract grants the buyer or seller the right, on the contract's expiration date, to buy or sell the underlying futures contract at a predetermined price. In India, all available options are traded on the final Thursday of each month.
An option is a right to purchase or sell an underlying asset at established prices, while a futures contract is an obligation on the side of buyers and sellers to execute the trade at predetermined prices on the mutually agreed-upon date. A futures option, on the other hand, is a right that a buyer or seller may exercise to perform a sale or purchase transaction of a futures contract on the expiration date.
A future option trading contract is a one-of-a-kind product since it is a derivative of a derivative. The value of a derivative is determined by the value of the underlying asset. In this case, the option's value (a derivative) is derived from the underlying derivative, a futures contract, which is a derivative of its underlying assets, such as commodities, bonds, indices, or equity shares. A futures option, for example, might be a call or put option contract on interest rate futures, commodity futures, stock futures, or any other underlying asset futures.
This is a future option trading contract in which buyers have the right to acquire commodity, currency, or stock futures at a mutually agreed-upon or striking price on the options' expiry date. The buyer of call options is deemed to be in a long position, which indicates that he will attempt to exercise his right to acquire the underlying asset if the strike price is lower than the current futures market price. He obtains this privilege by paying a premium and receiving a call option, which he may or may not exercise on the expiration date.
When the time period of an option expires, the holder of a put future option trading contract has the right, but not the responsibility, to sell the underlying futures contract. This is because the owner of a put option is deemed to be in a short position and is attempting to sell the underlying future contract at a strike price higher than the current price of the futures contract.
Selling futures options is a low-cost investment. You may profit by accurately timing your trades and picking the right strike pricing. If trading isn't your thing, you may try investing in upcoming IPOs. Whatever you select, keep a Demat and trading account in your name at all times. You cannot invest in the financial markets until you have one. You may open a Demat account with Motilal Oswal in just a few minutes.
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