Meaning Of Future And Option Trading

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Futures trading is a contract between a buyer looking to invest and a seller and where the contract is made for the future and has an expiration date.

It isn't practical to try to predict what the markets will do. What is practical, and essential, is to know that they change, and will continue to do so in the future. Prices can go up and down in response to countless factors, some predictable and some not, but change itself is a certainty. Knowing that change will happen, we can plan and be ready when it comes.

Meaning of future and option tradingFutures and options are derivative contracts that derive their value from underlying assets, like stocks, commodities, or currency. The parties involved in these contracts will be concerned about price fluctuations, which can mean the potential for profits or loss.

What are futures?

An investor buys a futures contract to buy Company ABC at Rs 50 each, from his or her broker. At the expiry of the contract, the investor will get those shares are Rs 50, irrespective of the current prevailing price. The one thing you would want to be careful of is the expiry date. If you want to buy 100 shares at Rs 50 each and you need to purchase them by a specific date, the security will go up in price if the demand is higher than supply. But if more people are selling this stock than buying, the price will drop. A futures contract agrees that it will work out for either party because the buyer and seller have already agreed on a price for the stock.

 

 Futures are invaluable instruments that help protect you from risk, be it the risk of price increases or price decreases. This safety net helps soothe a lot of anxiety faced by traders since they will not have to fret over sudden changes in market prices and can focus their time and energy on making better trading decisions. 

What are the Options?

Options contracts are a little different from futures contracts in that they give a buyer (or seller) the right, but not the obligation, to buy (or sell) a particular asset at a certain price at a specific pre-determined date.

 

There are two types of options: the call option and the put option. A call option is a contract that gives the buyer the right, but not the obligation, to buy a particular asset at a specified price on a specific date. A put option is a contract that gives the buyer the right to sell a particular asset at a specified price on or before a specific date. Let’s say you have purchased a put option to sell 100 shares of Company XYZ at Rs 50 each on a certain date. But the share price rises to Rs 60 before the end of the expiry period. You can then sell the shares at Rs 50 instead, giving you an additional profit of Rs 1,000 on top of the share sale.

Future Options trading in the stock market

Futures and options in the stock market are still new for many people. But this form of investment is gaining more and more popularity nowadays, so it’s definitely worth learning about it. The National Stock Exchange has introduced futures and options on 9 important indices and more than a hundred securities. Trading in futures and options can be done even through the Bombay Stock Exchange (BSE). Trading in futures and options is advantageous because you don’t need to buy the underlying asset. You just need to pay an initial margin to your broker for trading. For example, if the margin is 10 %, you can trade in stock futures worth Rs 10 lakh by paying only Rs 1 lakh as margin money to the broker. Higher volumes will increase your chances of making a good profit.

To learn more about the meaning of future and option trading follow the link given.

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