What are Futures and Options and How Does it Work?

The stock market provides numerous products for making investments and trading like mutual funds, NCDs, bonds, equity, IPO, derivatives. Futures and options come under derivatives, and derivatives are the contracts signed by two parties who want to purchase or sell the underlying stock at a fixed price.

Derivatives are classified into Forwards, Futures, Options, and Swaps. Future and options contracts are used for avoiding risk and making profits in a highly volatile circumstance. 

Trading in Futures and Options requires good knowledge, and you can learn about futures and options by joining a good stock market course. There are many courses available in the market, but The Thought Tree is best because they provide personal mentorship and job support to their students. Now, let’s look at what future trading is in the stock market.

What are Futures?

Futures are contracts made between two parties in which they agree to purchase or sell a stock at a fixed cost and at a particular time in the future. It will help lower the risk and losses related. 

For instance, consider a potato farmer, and the year has been good. With all the right conditions, the supply of potatoes is high, and the prices have decreased. In this case, you will suffer loss and the one who was going to purchase the potatoes. 

In the second case, the crops are destroyed because of the unseasonal rain. With the low supply, the price of potatoes has increased. And in this case, the buyer will have to invest more money, and he will be at a loss. So to avoid that, one should get into a futures contract. 

It will be useful and benefit you even in the case of the price going up and down in the market. For instance, the price of potatoes hits Rs. 400 after 5 months, but if you have previously made a futures contract at Rs. 500, you will make a profit of Rs. 100 even though the market price is Rs. 400. With this, you can foretell the future supply and demand and avoid the loss.

What are Options?

In an Option contract, the buyer gets the right but cannot purchase or sell the stock. However, the seller of the options contract has to purchase or sell the stock based on the option contract buyer’s decision.

For instance, you have bought a car and purchased the insurance for the car at Rs. 20,000. According to the agreement, if your car gets destroyed, you will get your life insurance. However, if this doesn’t happen, then the selected amount paid becomes the insurance company’s salary. 

There are 2 types of options which are the call option and put option:

Call Option

A call option is an agreement that gives an investor the right, but not the task, to purchase a stock, financial instrument, bond, commodity at a fixed price set within a fixed period. In simple words, it means that when you purchase a call, you get the right to purchase a fixed amount of shares or an index, at a fixed price, on or before a fixed date. The set price is the strike price or exercises price, and the date until which you can use the Option is called the expiry date.   

Put Option

A put option is an option contract that gives the owner the right, but not the task, to sell a fixed amount of underlying security such as stock, financial instrument, commodity, bond at a fixed price set within the fixed time.

A put option is a derivative contract between two parties where the buyer of the put option gets the right to use the option to put the option for a fixed range of time. Puts are the options contracts that allow you to sell the underlying stock asset at a set price at the time or before the set expiry date in the long run.

What is Future and Option Trading?

You can easily do trading in futures and options. For instance, you can trade the stock futures and options on stock exchanges, bonds, commodities on commodity exchanges. In this process of learning about F&O trading, it’s important to understand that you can do that without taking ownership of the underlying asset. But you might not want to invest in gold stocks, yet you can make the most of the exchange rate in the assets through the investment in gold futures and options. 

Final Word

So with this, we have reached the end of this article. Futures and options are super useful financial instruments to assure that all your earnings and equity investments are from a change in the price of the underlying stocks, bonds, commodities, and currencies.

It offers actual opportunities for investors to get good returns or safeguard their investments. For trading in futures and options for getting returns, get an expert to guide you in the start.

Happy trading!

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