by admin | July 16, 2024

Last updated on July 16, 2024,

Futures and Options are financial tools traded in stock markets by new and experienced traders. They let you bet on the price changes of assets like stocks, currencies, or commodities. However, there are differences between trading options and futures. In this article, we’ll explore futures and options trading and why it matters.

Futures and Options Trading

What is futures trading?

Futures are like a special deal for buying or selling something later at a set price. Things like shares in a company, stuff like coffee, silver, or gold can be part of these deals. There are two sides to a futures deal: the buyer, who wants to buy, and the seller, who wants to sell. The buyer promises to buy a certain amount of stuff, while the seller promises to provide it.

The contract price changes as the price of the real thing goes up and down. Traders either make money or lose money because of this. When people trade derivatives based on an agreement, it’s called futures trading. In futures trading, both buyers and sellers have to do what they agreed to do.

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What is lot size in futures trading?

In futures trading, the lot size is the smallest amount of shares you can trade. When you trade futures and options, you can only buy or sell them in these small lots, either one or more of them.

In futures and options trading, the lot size is the same. To find the total value of a futures contract, you multiply the lot size by the price.

Why is futures trading done?

There are several advantages of futures trading including:

Betting against the underlying asset is simple – You’ll have access to a larger range of assets when selling a futures contract, and it may be simpler than short-selling stocks.

Simple pricing – The current spot price serves as the basis for futures pricing, which are then modified to account for the risk-free rate of return through expiration and the expense of physically storing the commodities before they are physically delivered to the buyer.

High liquidity – Due to the high liquidity of futures markets, investors can easily switch positions without incurring significant transaction fees.

Easy to hedge positions – You can hedge against downside risk in your business or investment portfolio by taking a strategic position in futures.

Employ leverage – Leverage in futures trading might be higher than in a traditional stock brokerage account. With futures, you could receive 20:1 leverage when with a stockbroker, you might only receive 2:1. Naturally, higher leverage entails higher risk.

Most Traded Futures Contracts

Below are the most traded futures contracts at present.

  2. NIFTY
  4. IDEA
  5. HAL
  7. SBIN

What is options trading?

Options trading lets people guess how stocks or bonds will move in the future. It also lets them guess how the whole stock market will move. When you have an options contract, you can decide if you want to buy or sell a certain asset by a certain date at a set price.

An option is a deal in finance that lets a trader or investor buy or sell something like a stock, currency, or commodity at a set price for a specific time. These deals have an end date, usually the last Thursday of the month. When that date comes, the deal ends and becomes worthless. Unlike futures, options don’t make the buyer or seller do anything if they don’t want to.

An investor or trader who has an option can choose to buy or sell things like stocks, currencies, or commodities at a set price for a specific time. These options have an end date, usually the last Thursday of the month. When this date comes, the option ends, and its value disappears. Unlike futures, options don’t force the seller or buyer to stick to their deal.

What are types of option?

There are primarily two types of options: Call and Put.

What is call option?

Before the option expires, the holder of a call option has the option to purchase the underlying asset at the strike price. When an investor believes that the price of the underlying asset will increase, they usually employ call options.

What is put option?

In contrast, the holder of a put option has the opportunity to sell the underlying asset before the expiration date at the strike price. Put options are frequently used by investors who anticipate a decline in the value of the underlying asset.

What is strike price?

When the option is exercised, strike price is the price at which the underlying asset will be purchased or sold.

What is premium?

This is the cost of purchasing the right to purchase or sell the underlying asset and is the amount paid for the option contract.

What is in the money?

This is the sum of money that traders must put down as security when they trade options or futures. If a trade does not turn out as expected, the margin is utilized to offset any possible losses.

What is out of money?

This term refers to a choice that is devoid of inherent worth. When the price of the underlying asset is higher than the strike price, a put option is out-of-the-money, and when it is lower than the strike price, a call option is.

What does ‘At the money’ mean?

An option with a strike price equal to the current value of the underlying asset is referred to by this term.

Difference Between Futures & Options Trading

ParticularsFutures TradingOptions Trading
Gain or LossIt could have innumerable wins and losses.It reduces the chance of a potential loss, yet it still has the potential to bring you limitless gain or loss.
RiskThey carry higher risksThey carry limited risks.
ResponsibilityThe item must be purchased by the buyer on the designated future date.This does not require the buyer or the execution of the contract.
Advance PaymentWhen joining a futures contract, there is no entrance cost. Ultimately, nevertheless, the buyer must pay the agreed-upon amount for the item.A premium is required from the buyer in an options contract. If the asset starts to lose its attraction, the option buyer has the opportunity to choose not to purchase it at a later date by paying the premium. It should be mentioned that the premium paid represents the amount the holder of the options contract expects to lose should he choose not to buy the asset.
Contract ExecutionA futures contract goes into effect on a specified day. This particular day, the buyer acquires the underlying asset.Before the option expires, the buyer may exercise the option whenever they like. Because of this, someone is prepared to buy the asset whenever favorable conditions arise.

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FAQs on Futures and Options Trading

Q.1. Is options trading risky?

Ans:- If a trader does not exercise due diligence with regard to numerous elements such as market circumstances, volatility, continued trend lines, etc., then options trading may be riskier. If the proper strategies for protection and hedging are used, options don’t have to be chancier.

Q.2. What are the 4 types of options?

Ans:- The four types of options are buying call option (long call), selling call option (short call), buying put option (long put), and selling a put option (short put).

Q.3. Is options trading suitable for beginners?

Ans:- Compared to novices, seasoned investors with time to monitor the market and familiarity with it are likely to succeed in options trading.

Q.4. How long can I hold futures?

Ans:- One can hold future contracts till their expiry date.

Q.5. Is future option trading worthy?

Ans:- Future option trading’s suitability for a given investor relies on his investing objectives, risk tolerance, and ability to make wise trading choices. Before engaging in any trading activity involving futures or options, it is imperative to conduct a comprehensive investigation and consult a financial advisor due to the complexity and high degree of risk involved.

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