Futures and options (F&O) are derivative products, which means that their value is derived from an underlying commodity or asset. F&O trading varies fundamentally. Before you create a Demat account or search for the ideal online trading account, be sure you understand the fundamentals of F&O trading. Here's a guide to getting started:
Distinction Between Options And Futures
One of the most essential roles of security markets is risk management, and one of the most significant risks is time. Since prices vary all the time, time is a risk. A good transaction today might turn bad in a few months. Because options and futures are an offshoot of commodity markets, they must be understood in the context of commodity markets. Options and futures, unlike bonds and stocks, do not help you achieve long-term returns; rather, they are designed to offset certain risks that come as a result of ongoing price volatility.
Futures and options are contracts to purchase and sell assets in the future at certain prices and under specific circumstances. Although both options and futures enable an investor to purchase an investment at a certain price by a specific date, they operate in completely different ways. A futures contract compels a buyer to acquire shares and a seller to sell them on a certain future date, while an options contract offers an investor the right but not the responsibility to buy or sell.
How Do You Trade Futures And Options?
Contracts are used to trade futures and options. It might be one month, two months, or three months. On the final Thursday of each month, all F&O trading contracts expire. Futures trade at a price, which is often higher than the spot price due to time value, and there is only one futures price for a stock in every contract. For example, in January 2022, one may trade in stock X's January Futures, February Futures, and March Futures.
Trading options is tricky because you exchange premiums. As a result, separate strikes will be exchanged for the same stock for Call Options and Put Options. In the instance of stock X, the Call Options premium of 400 calls would be Rs 10, and these Option costs will gradually decrease as your streaks increase.
Options And Futures - Difference In Trading
Futures contracts allow you to trade stocks on a margin. However, the hazards on the other side are limitless, regardless of your position - long or short. In the case of options, the buyer may restrict losses to the premium paid.
When you buy or sell futures, you are required to pay an upfront margin in addition to MTM margins. On the other hand, when you sell an option, you are also required to pay initial margins in addition to MTM margins. When you buy options, the total cost that you should anticipate paying is the premium margins.
Wrapping Up
A right and an obligation to buy or sell an underlying asset at a predetermined price are both included in a futures contract. Options give you the right to buy or sell a share or index. A right to buy is referred to as a call option, whereas a right to sell is referred to as a put option. Options and futures are conceptually distinct but practically identical financial instruments. They both seek profits from stocks or indexes without actually investing the entire amount, so they can both be considered a form of hedge.
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