Futures and options are derivatives whose value derives from the underlyinng asset. The underlying assets include stocks, indices and commodities.

Futures contract enables a buyer or the seller to buy or sell stock at a certain predetermined price on a certain date in the future.

Options give a buyer or seller the right, but not the obligation, to buy or sell stock at a certain price on a predetermined date in the future.

There are two types of options: Call option and put option. A call option gives the right to buy a certain stock, while put option gives the right to sell the stock. Call option is when one expects the stock price to moves up. Put option is when one expects the stock price to fall.

Margin or Premium is what we pay the broker to trade futures. It is a percentage of the transactions we can make and is fixed at a maximum loss that one could incur. Margins will be higher in volatile times. We pay premium to the seller of the option.
Futures and options are valid for certain fixed period like one, two or three months. At the end of the expiry date, the contracts have to be settled either in cash or by delivery of shares.

There are two types of futures available in the stock market. One is index futures and another is individual stock futures. An index future is a contract whose underlying asset is the stocks that make up an index. A stock future is a binding contract between the buyer and seller to execute the buy or sell trade of the stock shares at a pre-determined prices on a specific date.

  • : The spot market / cash market is a marketplace where stocks are traded for immediate delivery / settlement.
  • : The exchange plays an important role in derivative instruments like futures and options. In futures, exchange will maintain refundable margin from both the parties and manages the trade. In options, it deals with the premium for the deal and executes it.
  • : Margin : Margin refers to refundable amount paid to the broker in futures. MTM : MTM means Mark to Market. Premium: Premium is the amount paid by buyer to seller for signing the options. Strike Price : Strike Price is the agreed price for the deal. Expiry Date: Expiry date is the date on which a particular contract expires. Lot Size: In options trading, lot size represents the total number of contracts contained in one derivative security.
  • : An options contract gives the buyer the right to buy the asset at a fixed price. There is no obligation on the part of the buyer to go through with the purchase. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.
  • : Call options are those contracts that give the buyer the right, but not the obligation to buy the underlying shares or index at the exercised price or within a specified time. Put option gives the buyer the right but not the obligation to sell the underlying stock at the exercised price or within a specified time.
  • : A Futures Contract is a legal agreement to buy or sell a particular asset / stock at a predetermined price at a specified time in the future. Futures contracts are standardised for quality and quantity to facilitate trading on a futures exchange.
  • : Futures/Call/Put are required for traders to customize the trading. In the derivative market, the entire stock price is not required and only margin needs to be paid. Derivative Markets reflects the price fluctuation on daily basis but in equity market it can be realised only when the stocks are sold.
  • : It is possible to trade NIFTY. NIFTY derivative contracts such as futures and options have the NIFTY index as the underlying asset. The price movement of the derivatives are linked to that of the index. Hence by trading in these derivative index, the profit / loss is more.
  • : In an F&O contract, when there is an open position that has not been squared off by its expiry date, physical settlement takes place. This implies that they have to physically give / take delivery of stocks to settle the open transactions. Cash settlement involves the purchaser or the contract holder to pay the net cash amount on the settlement date and execute the settlement. It is the price at which the sellers and buyers value an asset at that point of time.

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