What Is Futures And Options With Examples

What Is Futures And Options With Examples You can either buy/sell stocks from the cash market or the derivatives market. Derivatives include futures and options. You can trade in Nifty futures or Bank Nifty futures (stated by a daily mutual fund manager). After reading this article, you will have an understanding of what a futures contract is, how much margin it requires, and who are the participants in a futures contract are. You will also learn where you can start trading in futures contracts.

What is futures and options with examples: Futures and Options trading (F&O) has grown tremendously in India over the past few years. In 2000, a few months after the launch of the Future & Options segment, only 90,580 contracts worth Rs. 2,365 crores were traded in the first year. The number of F&O contracts traded on a single day reached 3.53 crore Contracts on December 30, 2020; with a turnover of Rs. 30,84,291.70 crores.

Futures and Option is a popular financial instruments, like stock trading. The derivatives market for trading in F&O is only getting popular with time and as a beginner, it’s a must to learn about it.

WHAT ARE DERIVATIVES? Derivatives are the financial instruments that derive their value from the underlying assets such as stocks, commodities, bonds, and currencies. Any fluctuations in the price of an underlying benchmark result in a fluctuation in the prices of its derivatives.

Derivatives trading is a type of contract that is exchanged between parties based on underlying assets. Just like the cash segment, you can buy/sell derivatives on exchanges. The major difference between cash and derivative segments is that in the case of derivatives, you only trade contracts and not the underlying asset.

Futures and options contracts are the most common examples of the derivative segment.

WHAT ARE FUTURES? Futures are derivative contracts that require the buying/selling parties to transact security at a predetermined future price and date.

The contract mandates the buyer to purchase and seller to sell the underlying security at a predetermined price on the expiration date, irrespective of its current price. A future's price is determined by the

supply and demand for that contract. If there is an ample supply and limited demand, then prices will decline; conversely, if demand exceeds supply, prices will increase. Locking in a future price allows an investor some protection against rising or falling prices in the future.

WHAT IS THE LOT SIZE IN FUTURES CONTRACTS? The lot size is the total number of shares included in a futures contract. It is with the help of lot sizes that the exchanges standardize and regulate the contract prices. For instance, currently, one futures lot of SBIN (State Bank of India) contains 3,000 shares of SBIN. Similarly, one futures lot of TCS (Tata Consultancy Services Limited) includes 300 shares of TCS. WHAT ARE OPTIONS? Options trading is a very commonly used investing method where the buyer of the contract has the right but not the obligation to buy or sell an underlying asset at a certain price. Options come in two varieties; call options, which are bullish and puts options, which are bearish. Options contracts also have an expiration date, after which they become void. There is no obligation to buy/sell as an option holder if they don’t want to. An option is considered “out-of-themoney” if the strike price is equal to or higher than the current market price for a call option and lower than current market price for a put option. Options are “in-the-money” if they are not “out of the money.” Options can also be exercised on or before their expiry date under various circumstances as per their contract specifications.

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