Introduction to Future and Options

Futures are basically contracts used to trade an investment instrument for a certain price on a specified date, sometime in future. In non-technical words, it is a bet placed on price of an instrument in future. Such is trading is technically, called ‘Futures Trading’. ‘Futures trading’ is done using ‘Futures Contract’. Futures contract is a standardized legal contract that mentions the specifics finalized for trading of futures. It mentions the instrument which traded (either sold or bought), the specified price and a pre-agreed calendar date in future.

Futures trading can be practiced on any of the options, including: trading commodities using futures, trading currencies using futures and trading in stock markets using futures. The futures trading involves two parties i.e. a seller party and a buyer party. Both the parties involved, make an attempt to predict the value of the instrument, in recent future (till a specified date). All these details are mentioned in the futures contract. There is no actual transfer of the instruments rather their price is predicted and based on the prediction money transfer takes place from one party to another.

In case, the expected price is reached on the specified date, the investor earns the profit. But, if there is a mismatch then, it ends in a loss. This kind of futures trading in India is governed by SEBI. This is a high risk involving investment and hence, only experienced professionals are advised to take a plunge into it.

Next, in contrast to the futures, there exists a second type of investment channel termed, ‘Options’. More information on basics and options trading is provided in the next few paragraphs.

Options are a type of investment which involves trading of a security, based on a mutually agreed price on a specified date. ‘Options’ predict the price of the security in near future in comparison to ‘futures trading’. This information is gathered from the stock market only. There are two types of ‘Options’ – one is called a ‘Buy’ or a ‘Call’ and the second is called a ‘Sell’ or a ‘Put’.

A ‘Call’ provides the instrument holder with the right to buy an instrument on a mutually agreed price on the specified date. Contrastingly, a ‘Put’ provides the instrument holder with the right to sell an instrument on a mutually agreed price on the specified date.

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