How to Trade in Future and Option?
Future and option trading are naturally complex instruments. That is why it’s important to start small and build your knowledge incrementally. Learn one concept at a time, gain confidence, and feel good about what you have learned. These tips will guide you through the process, making it easy to understand how futures and options work in India. Once you master these concepts, you can explore the other offerings of Kotak Securities.
Difference between Future and Option
Options and Futures are a type of Derivatives. A Derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset or set of assets. Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks. Most derivatives are characterized by high leverage. Options and Futures are a means to offset risk. Risk arises from the simple fact that prices keep changing, so what looked like a great deal today may appear hideous in tomorrow. In order to stabilize prices and protect the long-term gains of someone involved in commodity trade, such things as options and futures were introduced.
Futures and Options (F&O) Contracts are financial vehicles that allow you to trade in the stock market. The two main types of contracts are Future and Option trading, which work differently from each other. Although both options and futures allow an investor to buy an investment at a specific price by a specific date, one works very differently from the other. An options contract gives an investor the right, but not the obligation, to buy or sell but a futures contract requires a buyer to purchase shares and a seller to sell them on a specific future date.
How to trade in Future and Option?
Options and futures are traded in contracts. All options and futures contracts expire on the last Thursday of the month. Futures trade at a futures price which is normally at a premium to the spot price owing to the time value and there is only one futures price for a stock for one contract. For instance, during January 2020, one can trade in January F&O, February F&O, and March F&O of a stock X.
When you trade options, there are various strikes Traders buy and sell. Think of these as a range of prices where if the stock in consideration is trading above, it is Out Of The Money. For example, stock X has a strike price of 100. If the share is trading at 105, the premium will be Rs 10. If it is trading at 100, it will be At The Money while if it’s Rs 90, it will be In The Money. Strikes rise up from one strike to another in multiples of Rs 5 or Rs 10.
Conclusion
An option is a right and an obligation, without any obligation to buy or sell equity or index. While a Call Option is a right, a Put Option is the right to sell. Options and Futures are conceptually different but intrinsically same. They act as a hedge since both try to get returns from stock or an index without investing the full sum. You can open a trading account to explore futures and options.
