What is futures and options trading in india

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What are options?

Benefits of Options Contract Here are a few key benefits of Options contracts:. Futures vs Options Trading: Which strategy is better? However, here are a few key points to compare which strategy is better: Options are optional financial derivatives whereas Futures are compulsory derivatives instruments.

But in the case of Futures, both buyer and seller have equal risk associated with their trades. The options although they can be rolled but have a different premium for different expiry, but in case of futures, they are rolled over at the same price in the next contract.

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This ten-rupee differential could result in reduction of investment value. On the other hand, we have B, who has been tracking the performance of XYZ Company and given his intuition and expertise, feels that the stock price could increase to Rs in the next three months.

He wishes to buy the stock at a lower price now to sell later when the price increases in the future, thereby making a quick profit in the bargain. However, he can only pay a nominal sum now and arrange for the necessary funds to buy the stock in three months. Now, A and B submit their orders to the Exchange to enter into a futures contract with a maturity period of three months this is the maximum available time limit on the Exchange for the Futures segment. Once the orders are matched and traded, both traders hold their desired Futures positions as decided, so now A would hold a short position against his holdings.

Thus if the stock price fell below Rs , A would not lose the value of his holdings as he remains hedged against the lowering of price. In the above example A would be the seller of the contract while B would be the buyer.

This thus reflects the expectations that each party has from the Futures Contract they have participated in - B hopes that the asset price is going to increase, while A expects that it will decrease. Futures are used to both hedge and speculate possible price movements of stock.

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6. Benefits of Options Contract.

Participants in a Futures market can profit from such contracts because they can enjoy benefits without actually having to hold on the stock until expiry. In the above example, B is holding his buy position with the expectation of a possible increase in the price until the contract expires and can also hedge his position by entering into a another Futures Contract with C as a seller, with the same Contract specifications — ie — quantity, quality, price, time period and location.

B would thus, be able to deflect or offset any loss he may incur in his agreement with A. To sum up, Futures are leveraged standardised contracts with linear returns in reference to the underlying asset and are traded on a secure and monitored Exchange platform, thereby reducing credit risk. Understanding derivatives and what they mean.