{"id":3715,"date":"2023-03-08T15:03:00","date_gmt":"2023-03-08T15:03:00","guid":{"rendered":"https:\/\/rakshithpai.com\/?p=3715"},"modified":"2023-12-22T14:08:40","modified_gmt":"2023-12-22T14:08:40","slug":"futures-and-options","status":"publish","type":"post","link":"https:\/\/rakshithpai.com\/futures-and-options\/","title":{"rendered":"Everything you need to know about Futures &#038; Options:"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-662db008ae0a0\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\" style='display:none' id=\"ez-toc-cssicon-toggle-item-662db008ae0a0\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#What_are_Futures_Options\" title=\"What are Futures &amp; Options?\">What are Futures &amp; Options?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Futures\" title=\"Futures:\">Futures:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Futures_are_of_two_types\" title=\"Futures are of two types:\">Futures are of two types:<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Financial_Futures\" title=\"Financial Futures\">Financial Futures<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Commodity_Futures\" title=\"Commodity Futures\">Commodity Futures<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Options\" title=\"Options:\">Options:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Options_are_of_two_types\" title=\"Options are of two types:&nbsp;\">Options are of two types:&nbsp;<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Call_Options\" title=\"Call Options\">Call Options<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Put_Options\" title=\"Put Options&nbsp;\">Put Options&nbsp;<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Difference_between_Futures_Options\" title=\"Difference between Futures &amp; Options:\">Difference between Futures &amp; Options:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-11\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Right_vs_Obligation\" title=\"Right vs. Obligation\">Right vs. Obligation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-12\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Date_of_trade\" title=\"Date of trade\">Date of trade<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-13\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Risk\" title=\"Risk\">Risk<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-14\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Use_of_Derivative\" title=\"Use of Derivative:\">Use of Derivative:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-15\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Who_Invest_in_Futures_Options\" title=\"Who Invest in Futures &amp; Options?\">Who Invest in Futures &amp; Options?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-16\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Arbitrageurs\" title=\"Arbitrageurs&nbsp;\">Arbitrageurs&nbsp;<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-17\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Hedgers\" title=\"Hedgers\">Hedgers<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-18\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Speculators\" title=\"Speculators&nbsp;\">Speculators&nbsp;<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-19\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#How_to_succeed_in_F_O_Trading\" title=\"How to succeed in F&amp;O Trading:\">How to succeed in F&amp;O Trading:<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-20\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Terminologies_used_in_F_O\" title=\"Terminologies used in F&amp;O:&nbsp;\">Terminologies used in F&amp;O:&nbsp;<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-21\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Underlying_Security\" title=\"Underlying Security\">Underlying Security<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-22\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Premium\" title=\"Premium\">Premium<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-23\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Strike_Price\" title=\"Strike Price\">Strike Price<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-24\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Expiry_Date\" title=\"Expiry Date\">Expiry Date<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-25\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Conclusion\" title=\"Conclusion:\">Conclusion:<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-26\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#FAQs\" title=\"FAQs:\">FAQs:<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-27\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#For_more_Information_Check_this_Video\" title=\"For more Information, Check this Video: \">For more Information, Check this Video: <\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-28\" href=\"https:\/\/rakshithpai.com\/futures-and-options\/#Also_read\" title=\"Also read:\">Also read:<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"What_are_Futures_Options\"><\/span><strong>What are Futures &amp; Options?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>A futures contract is an agreement to buy or sell an underlying stock or other assets at a certain price and on a predetermined date. On the other hand, an option contract grants the investor the right, but not the obligation, to buy or sell assets at a predetermined price on a predetermined date, referred to as the expiry date.<\/strong><\/p>\n\n\n\n<p><\/p>\n\n\n\n<p>Both futures and options are financial products that investors can use to profit from or hedge against current assets. They are derivative instruments that allow an investor to purchase an investment at a certain price and on a predetermined date. However, the markets for these two items are fundamentally dissimilar in terms of how they operate and how dangerous they are for investors.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-1 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background wp-element-button\" href=\"https:\/\/upstox.com\/open-account\/?f=FN1853\" style=\"border-radius:50px;color:#0f0027;background-color:#e4fa00\" rel=\"nofollow\"><strong>Open Upstox Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Futures\"><\/span><strong>Futures:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Futures are contracts that must be resolved (paid for) after they are entered into.<\/strong> When you enter into a futures contract, you agree to purchase or sell the underlying asset at a certain price on or before a defined date.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Futures_are_of_two_types\"><\/span><strong>Futures are of two types:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Financial_Futures\"><\/span><strong>Financial Futures<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Futures contracts in the financial markets include stock futures, currency futures, index futures, and interest rate futures.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Commodity_Futures\"><\/span><strong>Commodity Futures<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p>Commodity futures, energy futures, metal futures, and others are all examples of physical futures.<\/p>\n\n\n\n<p>Let&#8217;s take oil as an <strong>example.<\/strong><\/p>\n\n\n\n<p>Assume two traders agree on an oil futures contract price of Rs. 6,000 per barrel. If the price of a barrel increases to Rs. 6,200, the contract buyer earns Rs. 200 per barrel. On the other hand, the seller misses out on a better deal.<\/p>\n\n\n\n<p>Beyond oil, the futures market has grown significantly. Stock futures are available for individual stocks as well as indices. <strong>The purchaser of a futures contract is not required to pay the entire contract&#8217;s value upfront. An initial margin is paid as a proportion of the price.<\/strong><\/p>\n\n\n\n<p><strong>For instance,<\/strong> a 1,000-barrel oil futures contract. An amount of Rs. 6,000 agreement to purchase an oil futures contract is equivalent to an amount of Rs. 6,00,000 agreement. The buyer may be obliged to pay several lakhs for the contract and may owe more funds if the buyer&#8217;s wager on the market&#8217;s direction proves incorrect.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Options\"><\/span><strong>Options:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>An options contract gives the buyer the right, but not the duty, to buy or sell the underlying asset at a certain price on or before a specified date.<\/strong> Options trading is an excellent way to trade equities without owning them.<\/p>\n\n\n\n<p>If the option buyer wants to avoid purchasing or selling the underlying asset, they may do so.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Options_are_of_two_types\"><\/span><strong>Options are of two types:&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Call_Options\"><\/span><strong>Call Options<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>A call option entitles the buyer\/holder to purchase a predetermined quantity of an underlying asset but does not obligate them to do so.<\/strong><\/p>\n\n\n\n<p><strong>For example,<\/strong> An investor purchases a call option to purchase stock XYZ at a strike price of Rs.100 at some point during the next 30 days. At present, the stock is trading at Rs. 90.&nbsp;<\/p>\n\n\n\n<p>If the stock increases to Rs. 120, the call buyer may exercise his or her right to purchase the earlier call option at Rs. 100. This buyer can then sell the shares for Rs.120, earning a profit of Rs.20 per share.<\/p>\n\n\n\n<p>Alternatively, because the call option is worth Rs.20 per share as profit, the option buyer can simply sell it and pocket the profit. If the option&#8217;s strike price is less than Rs. 100 at the time the contract expires, it is worthless. In such a case, the call buyer forfeits the option&#8217;s upfront payment, referred to as the premium.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Put_Options\"><\/span><strong>Put Options&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n\n\n\n<p><strong>A put option entitles the buyer\/holder to sell a defined quantity of an underlying asset but does not obligate them to do so.<\/strong><\/p>\n\n\n\n<p><strong>For example,<\/strong> If an investor purchases a put option to sell XYZ at Rs.100 and the stock price falls to Rs.80 before the option expires, the investor will earn Rs.20 per share, minus the premium paid. If the price of XYZ is greater than Rs. 100 at the time of expiration, the option is worthless, and the investor forfeits the premium paid upfront. <\/p>\n\n\n\n<p><strong>At any moment before the option expires, either they put buyer or the writer can close down their position to lock in a profit or loss. <\/strong>This is accomplished by the writer either purchasing the option or by the buyer selling the option. Additionally, the put buyer may elect to exercise his or her right to sell at the strike price.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"680\" src=\"https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-1024x680.jpg\" alt=\"Everything you need to know about Futures &amp; Options:\" class=\"wp-image-7688\" style=\"width:1199px;height:796px\" srcset=\"https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-1024x680.jpg 1024w, https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-300x199.jpg 300w, https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-768x510.jpg 768w, https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-1536x1020.jpg 1536w, https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne-150x100.jpg 150w, https:\/\/rakshithpai.com\/wp-content\/uploads\/2023\/03\/wb63zqj5gne.jpg 1600w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Difference_between_Futures_Options\"><\/span><strong>Difference between Futures &amp; Options:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Although both futures and options are classified as derivatives, they are slightly different.<\/p>\n\n\n\n<p><strong>In a futures contract, the buyer is required to purchase or sell the assets, whereas, in an option contract, the customer is not required to purchase or sell the assets.<\/strong><\/p>\n\n\n\n<p>They also have some other significant differences. Both derive their value from an underlying asset, such as stocks, commodities, exchange-traded funds (ETFs), or stock market indices. Both are indicative of a potential transaction.<\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-2 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background wp-element-button\" href=\"https:\/\/upstox.com\/open-account\/?f=FN1853\" style=\"border-radius:50px;color:#0f0027;background-color:#e4fa00\" rel=\"nofollow\"><strong>Open Upstox Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p><strong>The following are some significant distinctions between the two:<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Right_vs_Obligation\"><\/span><strong>Right vs. Obligation<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Futures contracts constitute a trade commitment that must be settled at a given date. Whereas <strong>options allow the buyer the right to exercise the contract but not the obligation to do so.<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Date_of_trade\"><\/span><strong>Date of trade<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>A futures holder is required to execute the transaction on the agreed-upon date.<\/strong> While there are variances in the case of options, you can exercise some options at any moment until their expiration date. There are various distinctions between exercising options on indices and on equities, as well as rules that vary by market. In India, for example, an index option may be exercised only on the expiration day, whereas a stock option may be exercised at any time prior to the expiration date.<\/p>\n\n\n\n<p><strong>There are no upfront charges associated with entering into a futures contract. You make the payment only when the futures contract is squared off on the stated date. <\/strong>However, futures contracts require that you deposit a &#8220;margin,&#8221; which is a percentage of the trade&#8217;s value. As a result, &#8220;leverage&#8221; amplifies both your earnings and losses.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Risk\"><\/span><strong>Risk<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>In the event of a price decline, you may elect not to exercise your options. <\/strong>You will not have the same freedom when trading futures, as the trade must occur on a given date, regardless of the price. As a result, options theoretically mitigate the risk of loss. In practice, however, <strong>97 percent of options expire worthlessly. As a result, options traders are far more likely than not to lose their premium.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-embed aligncenter is-type-wp-embed is-provider-embed wp-block-embed-embed\"><blockquote class=\"wp-embedded-content\" data-secret=\"zWfyx4T8OU\"><a href=\"https:\/\/rakshithpai.com\/et-money-genius\/\">ET Money Genius Review &#8211; Invest Like A Genius!<\/a><\/blockquote><iframe class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" style=\"position: absolute; clip: rect(1px, 1px, 1px, 1px);\" title=\"&#8220;ET Money Genius Review &#8211; Invest Like A Genius!&#8221; &#8212; \" src=\"https:\/\/rakshithpai.com\/et-money-genius\/embed\/#?secret=zYfuXhIjqk#?secret=zWfyx4T8OU\" data-secret=\"zWfyx4T8OU\" width=\"200\" height=\"200\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\"><\/iframe><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Use_of_Derivative\"><\/span><strong>Use of Derivative:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>The basic objective of derivatives is to protect investors against price fluctuations in the underlying assets.<\/strong> Derivative contracts have an expiration date. At the contract&#8217;s expiration, derivatives do not provide actual ownership of the underlying assets.<\/p>\n\n\n\n<ul>\n<li>These contracts are traded on the stock exchange and are regulated by the Securities and Exchange Board of India (SEBI).<\/li>\n\n\n\n<li>These are classified as financial instruments.&nbsp;<\/li>\n\n\n\n<li>The derivatives markets operate differently in terms of their operating system and risk.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Who_Invest_in_Futures_Options\"><\/span><strong>Who Invest in Futures &amp; Options?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>While futures and options trading has the potential for profit, they also include risk.<\/strong> This type of trading may not be suitable for all investors. Both F &amp; O have their own set of advantages and disadvantages.<\/p>\n\n\n\n<p><strong>There are several categories of traders who invest in futures and options:<\/strong><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Arbitrageurs\"><\/span><strong>Arbitrageurs&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>They are the people who seek to benefit from the difference in an asset&#8217;s price caused by market conditions.<\/strong><\/p>\n\n\n\n<p>Arbitrageurs seek to profit from market price discrepancies caused by market defects. In futures and options trading, the price quoted comprises the current price and cost of carrying value, as well as an underlying assumption that the striking price corresponds to the contractual price. Any price difference is due to the expense of carrying the underlying security to a future date, which is referred to as the &#8220;cost of carrying value.&#8221;<\/p>\n\n\n\n<p><strong>Arbitrageurs effectively eliminate any price differentials caused by imperfect trading conditions by altering demand and supply patterns in order to achieve equilibrium.<\/strong><\/p>\n\n\n\n<p>Futures and options trading is frequently conducted on leverage, which eliminates the need to pay the entire cost of trade upfront. Rather than that, a brokerage business finances a certain percentage of an entire contract on the condition that an investor maintains a minimum balance (marked to market value) in his or her trading account. It significantly boosts an investor&#8217;s profit margin.<\/p>\n\n\n\n<p>However, as previously stated, <strong>futures and options have a significant level of risk, as correct price movement projections must be made. <\/strong>To profit from derivative trading, a thorough understanding of stock markets, underlying assets, and issuing organizations, among other things, is required.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Hedgers\"><\/span><strong>Hedgers<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Hedgers are individuals who may be impacted by the price movement of a particular asset and hence invest in a derivative contract to hedge against the risks associated with the asset&#8217;s price movement.<\/strong><\/p>\n\n\n\n<p>These individuals buy into futures and options contracts in the stock market in order to mitigate the risk associated with price changes. Locking in a price for a future transaction enables individuals to realize relative benefits if the price swings in the opposite direction of a buyer&#8217;s trading position. <\/p>\n\n\n\n<p><strong>Individuals entering into a futures contract, on the other hand, may face huge losses in the event of an unfavorable fluctuation. Such risk is lessened by an option contract, which allows an investor to exit a trade in the event of unfavorable price fluctuations.<\/strong><\/p>\n\n\n\n<p>By engaging in a derivative contract, hedgers seek to secure future gains or expenditures. These traders are prevalent in the commodities market, where individuals attempt to secure an expected price for a certain item in exchange for a successful transaction. It&#8217;s easier to comprehend with the aid of a futures and options trading <strong>example. <\/strong><\/p>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-3 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background wp-element-button\" href=\"https:\/\/upstox.com\/open-account\/?f=FN1853\" style=\"border-radius:50px;color:#0f0027;background-color:#e4fa00\" rel=\"nofollow\"><strong>Open Upstox Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p>A farmer can enter into a futures contract with a wholesaler to sell 1,000 kilograms of Onions for Rs. 35 per kilogram three months from now. If the price of Onion falls below that amount on the day of maturity, the farmer has successfully hedged his position, reducing the overall risk involved with futures trading.<\/p>\n\n\n\n<p>However, in the event of an Onion market price increase, a farmer stands to lose profits. Such losses can be mitigated by a put option contract, which provides the farmer with the right but not the need to comply with the contract&#8217;s terms. In the event that the market price level falls, he or she might exercise the option contract to assure minimal losses. On the other hand, a price increase enables the farmer to exit the contract and sell the goods in the market at the prevailing price.<\/p>\n\n\n\n<p><strong>Hedgers prefer physical trades in which the asset is swapped at the contract&#8217;s maturity. <\/strong>It is particularly common in the commodity market, where manufacturers and firms engage in physical trading to keep the cost of raw materials constant. It ensures that an economy&#8217;s price levels remain stable.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Speculators\"><\/span><strong>Speculators&nbsp;<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p><strong>Speculators are those who invest in assets solely to profit from price volatility.<\/strong><\/p>\n\n\n\n<p><strong>Speculators forecast the direction of price movement in a market based on intrinsic valuation and economic conditions and then take a contrary position in the present to profit from such price swings. <\/strong>Using futures and options as an example, if an investor believes the price will grow in the future, he or she can enter the derivatives market and take a short position. It refers to the act of purchasing a stock or derivative in the present in order to sell it at a greater price at a later date.<\/p>\n\n\n\n<p>Individuals then take a long position, anticipating that prices will fall in the future based on their market analysis. Investors intend to profit in relative terms by purchasing securities at a discounted price in the future through such contracts.<\/p>\n\n\n\n<p><strong>The majority of traders in derivatives seek cash settlement, which avoids the physical transfer of an asset.<\/strong> On the contrary, the difference between the spot price (current market price) and the price quoted for the derivative is paid between the two parties, alleviating the inconveniences associated with such a trade.<\/p>\n\n\n\n<figure class=\"wp-block-embed aligncenter is-type-wp-embed is-provider-embed wp-block-embed-embed\"><blockquote class=\"wp-embedded-content\" data-secret=\"w9QkS11GZg\"><a href=\"https:\/\/rakshithpai.com\/timing-stock-market\/\">Timing Stock Market is Impossible! But Why?<\/a><\/blockquote><iframe class=\"wp-embedded-content\" sandbox=\"allow-scripts\" security=\"restricted\" style=\"position: absolute; clip: rect(1px, 1px, 1px, 1px);\" title=\"&#8220;Timing Stock Market is Impossible! But Why?&#8221; &#8212; \" src=\"https:\/\/rakshithpai.com\/timing-stock-market\/embed\/#?secret=M8Iq1a5h9f#?secret=w9QkS11GZg\" data-secret=\"w9QkS11GZg\" width=\"200\" height=\"200\" frameborder=\"0\" marginwidth=\"0\" marginheight=\"0\" scrolling=\"no\"><\/iframe><\/figure>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"How_to_succeed_in_F_O_Trading\"><\/span><strong>How to succeed in F&amp;O Trading:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ol>\n<li>Do your own homework &amp; do not rely on tips &amp; suggestions.<\/li>\n\n\n\n<li>Strict Capital allocation &amp; Stop Loss<\/li>\n\n\n\n<li>Trade with the trend!<\/li>\n\n\n\n<li>Have Emotions under control. Both Greed &amp; Fear shouldn\u2019t ride your decisions.<\/li>\n\n\n\n<li>Cover losses sooner and let the winners ride.<\/li>\n<\/ol>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Terminologies_used_in_F_O\"><\/span><strong>Terminologies used in F&amp;O:<\/strong>&nbsp;<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The following are some fundamental terms that will aid in your understanding of F &amp; O:<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Underlying_Security\"><\/span><strong>Underlying Security<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>An underlying security is the primary element of the futures and options through which this derivative contract derives its value.&nbsp;<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Premium\"><\/span><strong>Premium<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The premium is the current price (or charge) of an option contract that is paid by the option buyer to the seller. By and large, it is quoted on the exchange. The higher the volatility of the underlying asset, the higher the premium.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Strike_Price\"><\/span><strong>Strike Price<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>The strike price is the price at which the owner of an options contract agrees to buy or sell the underlying asset upon contract exercise.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Expiry_Date\"><\/span><strong>Expiry Date<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This is the deadline by which options must be exercised or they will expire.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span><strong>Conclusion:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><strong>Futures and options are frequently viewed as the &#8220;quick money,&#8221; &#8220;easy riches&#8221; or &#8220;go-to option&#8221; to make money. This is far from the truth!<\/strong><\/p>\n\n\n\n<p>These are fast-moving trades with daily margin fluctuations. Unlike stocks, which are geared toward long-term investors, futures and options are geared toward traders seeking immediate profits. If they are managed properly, they allow you to shield yourself from a volatile market while gradually increasing your gains.<\/p>\n\n\n\n<p><strong>Trading futures and options are not rocket science, but it does require some knowledge prior to getting started. It can be an excellent instrument for hedging your bets and mitigating market volatility. <\/strong>Alternatively, as a speculator, it can be a means to exploit volatility in order to earn outsized gains, but that technique has significant dangers of its own.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"FAQs\"><\/span><strong>FAQs:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<div class=\"wp-block-uagb-faq uagb-faq__outer-wrap uagb-block-c048e9b4 uagb-faq-icon-row uagb-faq-layout-accordion uagb-faq-expand-first-true uagb-faq-inactive-other-true uagb-faq__wrap uagb-buttons-layout-wrap uagb-faq-equal-height\" data-faqtoggle=\"true\" role=\"tablist\">\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-46ea2e96\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>Which is better <strong>Futures<\/strong><\/strong> <strong>or O<\/strong><strong>ptions?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">Futures offer a number of advantages over options, including the fact that they are typically simpler to comprehend and value, that they allow for a larger usage of margin, and that they are frequently more liquid. Yet, futures contracts are in and of themselves a more complicated investment instrument than the underlying assets that they follow. When you begin trading futures, you should make sure you fully comprehend all of the risks involved.<\/p><\/div>\n\n\n\n<div class=\"wp-block-uagb-faq-child uagb-faq-child__outer-wrap uagb-faq-item uagb-block-df251bf1\" role=\"tab\" tabindex=\"0\"><div class=\"uagb-faq-questions-button uagb-faq-questions\"><span class=\"uagb-icon uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M432 256c0 17.69-14.33 32.01-32 32.01H256v144c0 17.69-14.33 31.99-32 31.99s-32-14.3-32-31.99v-144H48c-17.67 0-32-14.32-32-32.01s14.33-31.99 32-31.99H192v-144c0-17.69 14.33-32.01 32-32.01s32 14.32 32 32.01v144h144C417.7 224 432 238.3 432 256z\"><\/path><\/svg><\/span><span class=\"uagb-icon-active uagb-faq-icon-wrap\"><svg xmlns=\"https:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 448 512\"><path d=\"M400 288h-352c-17.69 0-32-14.32-32-32.01s14.31-31.99 32-31.99h352c17.69 0 32 14.3 32 31.99S417.7 288 400 288z\"><\/path><\/svg><\/span><span class=\"uagb-question\"><strong>Which is safe Future or Option?<\/strong><\/span><\/div><p class=\"uagb-faq-content\">In the context of futures and options, the degree to which you are willing to take on risk is one factor that may come into play; nonetheless, it is a given that futures carry a higher amount of risk than options do. Changes in the price of an underlying asset, no matter how small, can have a big impact on your trading capital. This is especially true when compared to trading in options.<\/p><\/div>\n<\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"For_more_Information_Check_this_Video\"><\/span><strong>For more Information, Check this Video:<\/strong> <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<figure class=\"wp-block-embed is-type-video is-provider-youtube wp-block-embed-youtube wp-embed-aspect-16-9 wp-has-aspect-ratio\"><div class=\"wp-block-embed__wrapper\">\n<div class=\"ast-oembed-container \" style=\"height: 100%;\"><iframe loading=\"lazy\" title=\"What are Futures &amp; Options? Meaning, Types &amp; differences. How to invest in F&amp;O? #FandO\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/JyqxcOy6ZCw?feature=oembed\" frameborder=\"0\" allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\" referrerpolicy=\"strict-origin-when-cross-origin\" allowfullscreen><\/iframe><\/div>\n<\/div><\/figure>\n\n\n\n<div class=\"wp-block-buttons is-horizontal is-content-justification-center is-layout-flex wp-container-core-buttons-is-layout-4 wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link has-text-color has-background wp-element-button\" href=\"https:\/\/upstox.com\/open-account\/?f=FN1853\" style=\"border-radius:50px;color:#0f0027;background-color:#e4fa00\" rel=\"nofollow\"><strong>Open Upstox Account Now!<\/strong><\/a><\/div>\n<\/div>\n\n\n\n<p><b>Disclaimer<\/b>: All the information on this website is published in good faith and for general information purpose only. <\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Also_read\"><\/span><strong>Also read:<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<figure class=\"wp-block-table\"><table><tbody><tr><td><a href=\"https:\/\/rakshithpai.com\/best-banking-stocks-to-buy\/\" target=\"_blank\" rel=\"noreferrer noopener\">Top 10 Banking Stock to Buy in India &#8211; 2022<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/minimalist-investing-better-investor\/\" target=\"_blank\" rel=\"noreferrer noopener\">How to be a Minimalist Investor?<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/what-is-metaverse-how-to-invest-in-metaverse\/\" target=\"_blank\" rel=\"noreferrer noopener\">What is Metaverse &amp; How to Invest in Metaverse?<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/elss-mutual-funds-benefits\/\" target=\"_blank\" rel=\"noreferrer noopener\">Equity Linked Savings Scheme (ELSS) Investing &amp; Benefits<\/a><\/td><\/tr><tr><td><a href=\"https:\/\/rakshithpai.com\/yes-bank-stock-analysis\/\" target=\"_blank\" rel=\"noreferrer noopener\">Yes Bank Ltd. Is it Worth Investing?<\/a><\/td><\/tr><\/tbody><\/table><\/figure>\n","protected":false},"excerpt":{"rendered":"<p>What are Futures &amp; Options? A futures contract is an agreement to buy or sell an underlying stock or other assets at a certain price and on a predetermined date. On the other hand, an option contract grants the investor the right, but not the obligation, to buy or sell assets at a predetermined price [&hellip;]<\/p>\n<div class='heateor_sss_sharing_container heateor_sss_vertical_sharing heateor_sss_bottom_sharing' style='width:44px;right: -10px;top: 100px;background-color: Dark Blue' data-heateor-sss-href='https:\/\/rakshithpai.com\/wp-json\/wp\/v2\/posts\/3715'><div class=\"heateor_sss_sharing_ul\"><a aria-label=\"Facebook\" class=\"heateor_sss_facebook\" href=\"https:\/\/www.facebook.com\/sharer\/sharer.php?u=https%3A%2F%2Frakshithpai.com%2Fwp-json%2Fwp%2Fv2%2Fposts%2F3715\" title=\"Facebook\" rel=\"nofollow noopener\" target=\"_blank\" style=\"font-size:32px!important;box-shadow:none;display:inline-block;vertical-align:middle\"><span class=\"heateor_sss_svg\" style=\"background-color:#0765FE;width:40px;height:40px;margin:0;display:inline-block;opacity:1;float:left;font-size:32px;box-shadow:none;display:inline-block;font-size:16px;padding:0 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