A Basic Introduction To Futures And Options
In the world of derivatives and their market landscape futures and options are instruments and key players that provide derivatives with their actual flexibility and make them lucrative for the traders. Derivatives are financial instruments whose values are driven by underlying assets including future and options. Shares and equities, debt currencies or various asset indices too can be the underlying asset in the derivatives market. The basic purpose of futures and options in derivative trading is transferring price risk from one party to another and also facilitating the allocation of risk from one party to another – actually to those who are willing to take the risk. Increasing and widespread popularity in exchange traded derivatives market segment as well as individual stock features and options is one of the major success of the Indian stock market during the last ten years or so. In the market segment of exchange traded derivatives even claiming a leadership is justifiable for this a product that hardly shown any record of previous success even in the most developed markets. In derivative trading the term ‘futures’ refers to a contract or agreement between two parties regarding selling or purchasing an underlying asset in future against a price that is agreed upon in present. These contacts are standardized by the exchanges and apart from only the price against which the asset will be sold or purchased all other terms in future and options are set by the concerned stock exchanges. Purchasing a future contract means that, an individual is agreeing to pay a specific predetermined price for an asset after a specific time. On the contrary the individual who is selling the futures and options is also effectively making a promise for transferring the asset against that same price and the time as per the agreement. On the other hand options contracts are instruments those allow the holder the right which is not an obligation to buy and sell any underlying asset against a predetermined price. Options can be of two types – ‘call’ actions and ‘put’ options. The ‘call’ option allows the buyer the right and not the obligation of buying an asset for a given price while the ‘put’ option gives him the right to sale without any kind of obligation. In order to participate and benefit from future and options contracts an initial deposit of cash known as ‘margin’ is required to be deposited by the traders in their respective accounts. At the time of contract closing the initial margin is credited with the gain or the loss that will accrue over the contact period. In addition to this if there is any change in future price from the predetermined price that is also settled and monitored by the exchange that uses the margin money for ensuring appropriate daily profit and loss. A wide range of futures and options strategies are used in the market those are generally involved in purchasing and selling different types of options and future contracts.