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.