Futures and options trading looks so lucrative but SEBI expressed concern for futures and options trading because it can be so stressful as people lose lakhs of rupees daily. So let’s talk about futures and options trading so that you can get an idea of futures and options trading.
What is futures and options trading
In the stock market, many people are still ignorant of futures and options. But since they’ve become more and more popular recently, it can be beneficial for you to know more about it. In 2000, index derivatives were established by the National Stock Exchange (NSE) on the Nifty 50 benchmark. Currently, you can trade over 100 equities and nine major indices through futures and options. The Bombay Stock Exchange (BSE) allows you to trade options and futures.The fact that you may invest in futures and options without having to pay cash for the underlying asset is a significant benefit. To trade, all you have to do is give the stockbroker an initial margin payment. Assume, for instance, that the margin is 10%. Therefore, you can trade stock futures valued Rs 10 lakh by giving the broker Rs 1 lakh in margin money. Your chances of turning a profit are better with larger volumes. However, if share prices don’t rise as you had anticipated, you could suffer enormous losses. It makes your disadvantage much more serious. Because you can decide not to exercise an option when prices don’t move in your favor, options carry less risk.
Difference between futures and options
Contracts for futures and options are investment vehicles that are used to make predictions about how asset prices will change in the future.On the investor’s obligations, however, they diverge greatly.Futures contracts establish a legally-binding commitment to purchase or sell an underlying asset by a certain deadline at a defined price.It is the investors’ responsibility to fulfill this contract, regardless of the market price at expiration.Options contracts provide the buyer or seller the option, but not the obligation, to purchase or sell the underlying asset by a specified date and at a specified price.Investors are free to let the option expire worthless or exercise it if it starts to turn a profit.
What is call option
A call option is a legal agreement that grants the buyer the right, but not the responsibility, to purchase a certain asset on a given date for a predetermined price. Suppose you have bought a call option that entitles you to purchase 100 shares of Company ABC at ₹50 a share on a specific date.However, since you will be losing money if the share price drops to ₹40 before the expiration time ends, you are not interested in carrying out the contract.After then, you might choose not to purchase the shares for ₹50. Your only loss, therefore, will be the relatively smaller premium you paid to get into the contract, as opposed to losing ₹1,000 on the deal.
What is put option
The put option is an additional kind of option. You can sell the assets in this kind of contract at a predetermined price in the future, but not the obligation.For example, if you own a put option to sell Company ABC shares at ₹50 at a later time, and the share price increases to ₹60 prior to the option’s expiration, you can choose not to sell the share at ₹50. Thus, you would have saved ₹1,000 from losing money.
