F&O Principles

Derivative markets is all about making deals now and the settlement happens in the future. There are two types of instruments in Derivative markets. They are futures and options. They differ based on the settlement style. Futures market works on the agreement to buy or sell the asset at a specific pre-determined price. The settlement is compulsory. In case of OPTIONS, there are various flavours of instruments. CALL and PUT. A Call Option buyer buys the right to buy the asset at a pre-determined price. If the price of the asset goes beyond the agreed price(Strike Price), the buyer gets a benefit and therefore exercise the option. If the price of the asset goes below the agreed price (Strike price), the buyer will not exercise the option. The PUT option buyer buys the right to Sell the asset at a pre-determined price. If the price of the asset goes down from the current price, the PUT option buyer gets the benefit and therefore exercises the option, if not he will not exercise the option