People use trading and investing interchangeably but both aren’t one and the same. In fact, the former follows the latter. Trading in stocks is entirely different from trading in futures options, as the latter requires immense knowledge about derivative markets. So, before we jump any further, let’s comprehend what are futures options in the derivative market.
Simply put, futures are a derivative contract between a buyer and a seller. Here, the contract is made to either buy or sell a security or any underlying asset class at a preset price on a future set date. Options are another type of derivative product that allows buying or selling of the underlying asset at a futuristic date but no obligations are in place. Traders don’t need to open a demat account to trade futures options. A brokerage account would suffice.
Since futures have the obligation to fulfill the deal, there’s more risk involved compared to options. However, both these derivatives are handy for traders who want to trade underlying assets, speculate the future markets, and hedge against risks.
Generally, futures can be traded by anyone if they have profound knowledge and expertise with respect to the derivative markets. The concept of futures came into existence after being started by institutional buyers like banks, wealth management and insurance companies, hedge funds, etc. These financial players manage and operate the prices at both the ends by setting up the prices beforehand to avoid risks caused by market swings. Some of the most common types of investors who invest in futures are spectators and hedgers. Even retail buyers invest in futures to gain advantage and share of profits from the price swings of futures.
Speculators are none other than daily traders and interested individuals who want to gain swift returns on betting the price movements in advance. Irrespective of the umbrella speculators fall under, the main motto behind their inclusion is to gain profits. Future trading also uses technical and fundamental analysis for determining or pre-fixing future prices like stock trading. The trade volume created by speculators results in liquidity for the hedgers.
Some of the examples of hedgers are oil companies, farmers, food producing and shipping companies, etc. Since exports-imports take more time to deliver the products, such companies are also considered as hedgers. They take the future market into consideration whilst deciding their next move concerning price changes. The reason is they are vulnerable to ups and downs in the price down the line. Hence, they lock the price beforehand to secure your price from risks, volatility, and market swings. This is more or less like an insurance where you pay for it to prefix the price to buy or sell at a futuristic date in the market. Moreover, even stock traders invest in futures as well to secure your portfolio from plummeting markets.
Any trader with a brokerage account can invest in or trade options. In this market, there are multiple players who mainly deal with options like market makers, retail traders, proprietary traders, institutional investors, brokers-dealers, etc. To begin with, retail investors or traders are none other than regular traders like you and other individuals who like to trade. These traders invest in options to grab profits for their personal gratification.
Institutional investors are hedge funds, endowments, mutual funds, etc. They trade or invest in futures options to speculate or hedge their positions in the market. Brokers-dealers are those who invest in or facilitate trade on behalf of the traders. Their objective is to give the traders the best outcome upon trade execution.
Finally, the market makers, another biggest financial player in the futures options market. The list includes trading companies, banks, etc. While making bids, buying, and selling for their own firms, these market makers enjoy their share of returns from the price differences. Upon buying and selling, these market makers also generate liquidity in the market as well.
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