The stock market has many products that can be used for trading and investment. There are many options available, including mutual funds, equity and IPO, NCDs as well as bonds and derivatives. Let's now look at futures and options which fall within the scope of derivatives. Derivatives are agreements between two people who are willing to purchase or sell an underlying asset at a set price and time. These tools help to transfer risk to those who are willing to accept it. There are four types of derivatives: Futures, Options, Futures and Swaps. Future and options contracts can be used to hedge against volatility and increase profits. Prices of goods can suddenly rise or fall. Future contracts are therefore crucial. Let's first discuss future trading on the stock market.
Futures are agreements between two parties that allow them to purchase or sell a specific asset at a certain price at a future date. This reduces the risk and loss involved. Imagine that you are a soybean farmer. The supply is plentiful and the prices drop. As a farmer, you will lose your crop. Now think about the soybean buyer. Unexpected droughts cause soybean prices to rise. As a buyer, this means that he must spend more to avoid losing. It is important to sign a futures contract in order to avoid such losses. You will be protected regardless of market fluctuations. If the soybean price reaches Rs. 350 after three months. However, if you already have a futures contract at Rs. You will make a profit of Rs. 50, even though the market price of Rs. 350 This allows you to predict future demand and price, as well as reduce losses. Futures contracts allow you to trade with smaller margins
The option contract gives the buyer the right to purchase or sell the asset, but not the obligation. The option contract buyer's decision does not affect the seller's obligation to purchase or sell the asset. You may have an example: you own a bike, and bought insurance for it at Rs. 10000. Your insurance company will pay your claim if your bike is damaged. If there is no damage to your bike, you will get your insurance claim as per the agreement. However, the premium that you have paid becomes the income of the insurance company. Option buyer has unlimited return potential, but the risk of loss or damage is limited to the premium. Option seller returns only the premium, while the risk is unlimited. The call option and put option are the two types of option.
In such cases, the owner is free to purchase the asset but not required to. You could, for example, have a call option agreement with Kumar to buy TCS shares at Rs. 500 TCS is available at Rs. 600 You will most likely prefer to purchase shares from Kumar at Rs. 500 instead of paying Rs. 100 more Your profit is Rs. In this instance, your profit is Rs. If the share price is Rs.400 on the market, then you'd prefer to purchase it from Kumar rather than from the market. What profit does Kumar make here? You are required to pay a premium when you sign a contract. Even if you don’t purchase shares from Kumar, the premium that you paid earlier is still a benefit to him.
The buyer of a put option has the right to sell, but is not required to do so. However, the seller of a put option has to purchase. The premium is paid by the buyer. Contract buyer makes unlimited profits, while contract seller only makes a small percentage.
Stock futures are based on a single stock as the underlying asset. These contracts include information about the market lot, tick size and expiry dates, as well as price quote and other standard specifications. Futures prices are based on the sum spot price and cost to carry. >
These are calculated based on an underlying indicator. This is an important tool to hedge your risk. This allows you to purchase shares indirectly through the purchase of an index. Futures trading offers huge potential for profit. This article will give you a glimpse into future and options contracts. Have fun trading!