Introduction to Futures and Options

Posted By : Team SMI

MAKE THE WINNING MOVES   WITH FUTURES AND OPTIONS

Our life takes a more exciting turn when we meet two sweet and joyful words…futures and options. We can see that big smile on our face at the sight of these two words.

The word Future holds a beautiful world of hopes and promises in itself. Future brings more happiness and signifies possibilities.

Options is another friend who gives us a platform to explore many things. We are fortunate to have these two friends and they too compete for our attention.

 

How about having these two as our close buddies when are navigating through the world of stock markets? It is indeed great to have them helping and guiding us to soar high in trading.

We shall get introduced to them, and we are sure they will be helpful to us.

 

The world of stock market:

In this lively world of stock markets, which is a network of buyers and sellers, trading takes on significance. Stock markets, as we are aware, enhance the economic development of a country. With optimism around in this domain, stock markets are important from both the industry’s point of view as well as the investor’s point of view.

In this intricate but interesting arena, the derivatives are one of the most complex financial instruments.

Derivatives are instruments whose value is derived from the value of one or more underlying asset classes, be it commodities, precious metals, currency, bonds and stocks. The value of the derivatives change according to the changes in the value of the underlying asset class.

Futures and Options are types of Derivatives. On the basis of their trading purposes, participants in the derivatives markets can be segregated into four categories – hedgers, speculators, margin traders and arbitrageurs.

With these two friends-futures and options, trading becomes more interesting and exciting. They are two of the powerful tools utilized by the investors.

 

 

Moving forward with futures:

 

Futures are contracts that represent an agreement to buy or sell a set of assets, at a specified time in the future, for a specified amount. Every futures contract has the following features-Buyer, seller price and expiry

The underlying asset in a futures contract could be commodities, stocks, currencies, interest rates and bond. The futures contract is held at a recognized stock exchange which acts as mediator and facilitator between the parties. In the beginning, both the parties are required by the exchange to put a nominal amount as part of contract, known as the margin.

The payment and delivery of the asset is made on a future date termed as the delivery date. The buyer in the futures contract is known as holding a long position.  The seller in the futures contracts is said to be having short position.

Since the futures prices are bound to change every day, the differences in prices are settled on daily basis, from the margin.

 

Futures trading has many advantages, and it is insightful to understand them.

 

  1. Futures are good for trading certain investments:

Futures are a great way to trade specific investments, such as commodities, currencies Their standardized features make them particularly useful for the risk-tolerant retail investor.

  1. Fixed upfront trading costs:

Here the trader knows in advance how much has to be put up as initial margin. The more volatile the underlying, or the broad market, the higher the premium paid by the option buyer.

 

 

  1. Power of liquidity

Most futures markets are very deep and liquid, especially in the most commonly traded commodities, currencies and indexes. This reassures traders they can enter and exit positions when required.

 

Exploring opportunities with Options

 

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a ‘call’ option or a ‘put’ option.

 

A ‘call’ option gives the buyer, the right to buy the asset at a given price. This given price is termed as the ‘strike price’. While the holder of the ‘call’ option has a right to demand the sale of asset from the seller, the seller has only the obligation and not the right.

 

A ‘put’ option gives the seller a right to sell the asset at the ‘strike price’ to the buyer. Here the seller has the right to sell and the buyer has the obligation to buy.

 

Options trading as an investment strategy offers many advantages.

 

  1. One of the main advantages is that trading options requires the trader to commit less capital to an investment than a stock, or any other type of asset class, but still make more profit compared to other forms of trades. This can mean more money in the pocket with less investments.

 

  1. Options also allow the trader to create trading strategies with limited risk of loss, but with high probabilities of success. This enables complete control over the exposure to any risk.

 

  1. Options prices are readily available from a wide range of sources, particularly from the Internet. This makes it easy for traders to monitor market movement, find the best entry and exit points, and determine future positions.

 

Enthusiastic and eager to discover more deeply…. the exciting world of futures and options, and want to make them your best buddies?

No worries. After learning derivatives trading. Stock Market Institute (SMI), based in Bangalore, is proud to present a variety of enriching courses to make people knowledgeable about trading strategies.

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