Futures contracts are available for more than just mainstream commodities. Some futures contracts are even designed to hedge against weather risk. Now, virtually all financial and commodity markets are linked, with futures and cash markets functioning as a single entity on a daily basis. Both Futures and Options contracts are securities that require binding agreements. However, in Options you have the right to buy or sell an underlying security or asset without being obligated to do so, as long as you follow the rules of the contract.
Investing in Futures and Options trading is not without risks. Many experienced traders say that you need a lot of money to begin trading in Futures and Options. So the reality is that different people fare differently depending on their trading ability, irrespective of the experience. A trader with 10 lakh in equity can lose or gain large amounts just as easily as you could with 1lakh worth of equity in your account.
Futures and Options trading is risky business and requires you to be active at all times. Stay connected to the market at all times to be successful in Futures and Options trading and there are so many places oozing with knowledge - Internet, television, and financial websites, reports. This checklist has some key questions that can help direct your research as you consider trading futures and options. Are you trading an Indian or a foreign option? And is it an exchange-traded or dealer-traded option? Exchange-traded options have standard contracts that are more liquid and can be hedged better against risk.
Who is guaranteeing the transaction? Are you unnecessarily paying extra premium? What is the break-even price for your option? How much does the price of the option have to grow before you start making money? Equity Mutual Funds s. Hybrid Mutual Funds. Debt Mutual Funds. Top Performing MF s. Index Funds. Stock market offers several products for investment and trading purposes.
Let us learn about futures and options that fall under the category of derivatives. Derivatives are contracts that are made between two parties willing to buy or sell the underlying asset at a fixed price and fixed time. These are risk management tools that help in transferring risk to those who are ready to take the risk.
Learn the Basics of Forwards, Futures & Options Online in India | Tradebulls
Derivatives are of 4 types: Forwards, Futures, Options and Swaps. Future and options contracts are used as hedging tools to reduce risk and make profits in a highly volatile situation. The prices of goods may suddenly rise or even fall. This necessitates the importance of future contracts.
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Firstly, let us read about what is future trading in stock market. Futures are contracts made between two parties wherein they agree to buy or sell a particular asset at a fixed price at a particular time in the future. This helps in reducing the risk and losses involved. You will be at loss as a farmer. Think of the soybean buyer now. Due to unexpected drought, the price of soybean goes up.
How to Trade in Futures and Options?
So as a buyer, he has to shell out more and hence he faces loss. To avoid these losses, it is essential to enter into futures contract. This will protect you irrespective of the market fluctuations. For example, the price of soybean hits Rs. By this way, you can predict the future demand, price and also reduce the losses.
You can actually trade using lesser margins in case of futures contract. Option contract gives buyer the right, but he is under no obligation to buy or sell the asset.
For example, you have a bike and purchased insurance for the bike at Rs. If your bike is damaged, you will get your insurance claim as per the agreement. But if no such damage happens, the premium you paid becomes the income for the insurance company. In case of option buyer, the return potential is unlimited whereas risk or loss is limited to premium only.
In case of option seller, return is limited to the premium whereas the risk involved is unlimited. There are 2 types of options namely call option and put option. In this case, the owner has the right but has no obligation to buy the asset.
One can make money from stock futures even when the market is declining (short selling).
The price of TCS in the market is Rs. So you will definitely prefer to buy share from Kumar at Rs. Your profit is Rs. If the price of the share is Rs. So what profit does Kumar get here? When you enter into a contract, you are required to pay a premium. Put option buyer has the right to sell but has no obligation to sell the contract and put option seller has the obligation to buy.
In this case too, the buyer of the contract pays premium. Profit is unlimited in case of contract buyer whereas it is limited in case of contract seller. In case of stock futures, the underlying asset is an individual stock. Market lot, tick size, expiry date, price quote and other standard specifications are mentioned in these contracts. Futures price is based on the sum of spot price and cost of carry.
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These are based on an underlying index. This is a very important tool with which you can hedge your risk. It gives an opportunity to buy shares indirectly by buying the index. Start trading in futures as it offers tremendous potential to make profits. Hope you got a glimpse of future and options contract by reading this article. Happy Trading!
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