There
are other instruments for trading in Stock Market apart from stocks, these are
known as future and options. In this article we can know about what are future
and options? And how to do trading in them.
Future
and options Trading is also known as Derivative instruments trading. In these
instruments value can be derived from various Instruments available for trading
such as :-
(i)
Shares
(ii)
Debt Instruments
(iii)
Currency
(iv)
Commodity
Now let’s
know about Futures and options in details:-
Futures Trading:-
In
Futures a contract is signed between two parties to buy or sell that Share/
Commodity etc. at a certain time in future and at a certain price. In futures
there is a fix quantity of stocks which is to be bought and sell the same in
future. These contracts are mostly used
for arbitrage by Traders. In this methodology Traders buy stocks in cash market
at lower price and sell the same at higher prices in future market and vice
versa also, by doing this traders can get price difference as profit.
In
future contracts you need to pay a fixed cost against contract price. E.g. if
there is Share having share price of 298 Rs/Share and in future contract
quantity is 1000 shares, then in future contract share will be available at 300
Rs/ Share. Then future contract price will be 300000 but you need to pay only a
fraction of that price to buy this future contract. Now every day price of
future get up and down now differential cost will get credited and debited into
your account at end of day.
For
example if now share price closes at 303 at end of day then you get 3 Rs /share
and means profit of 3000/- get credited into your account at end of day. Futures are expired at every last Thursday of
the month.
Futures
are having certain validity. You can buy a future of future months but as you
buy future having highest validity then you have to pay more premiums against
the share price in cash market.
You can
sell in futures also as you can carry your positions for future months as in
cash market you can’t sell stocks and carry forward the positions.
Options Trading:-
In
option trading there are call and options trading. Option trading gives buyer
the right but not the obligation as buyer can choose let the option to buy a
call or put option lapse. But in case of future contracts there is an option at
both ends i.e. buyers and sellers.
'Calls' give the buyer the right, but not the obligation to buy
a given quantity of the underlying asset, at a given price on or before a given
future date.
'Puts' give the buyer the
right, but not the obligation to sell a given quantity of underlying asset at a
given price on or before a given future date.
In Option trading a call
or put can be bought at future strike price of stock. E.g. if there is a stock
trading at 300 Rs/ Share and in future you may see that share price will be 320
rs/ Share in same month then you may buy call option of that share. Now as
share approaches 320 Rs/ Share call option price get increased. In call option
if share price increases to 320 rs/Share then option price may not increase as
on last day of expiry all options become zero. So traders must exit at suitable
time.
Similar is the case for
put options. As in case of future contracts options differential at end of day
get credited and debt into account.
Traders usually use Call
and put options for hedging positions.
They generally use hedging in different segments to generate profit from
the same.
Difference between Future and Options
contracts:-
1.
In Futures there is no limit on profit and also there are huge
losses associated with futures but in options loss in limited and profit is
unlimited.
2.
In future contracts
buyers have obligation but in options buyers have obligation to buy or sell.
3.
In futures higher margin
is required but in options lower margin is required.
4.
These are preferred by
arbitragers and options are preferred by hedger.