What are Futures & Options (F&O)?

Derivatives are financial instruments that take account of the value of other assets. Two such derivatives of another purchase are futures and options. Derivatives of different assets such as equity, commodities or currencies are futures and options. The value of derivative instruments, such as futures and options, will also change in the event of an asset price fluctuation. Market participants usually enter into derivatives markets to benefit from a prediction of the asset value.

If the company's stock price falls, you may be losing money as a result. In this case, you can enter into a derivative contract, i.e. the future of the stock and options to profit or protect yourself from losses on the spot market where the stock is traded, to hedge these losses. Understand the f&o meaning in this article.

Difference between Futures and Options

As far as obligations imposed on individuals are concerned, futures and options trading is different. An options contract confers an individual the right to do so, while futures act as a liability for the investor, requiring him to follow up on an agreement by the due date. At the contractual price, a futures contract to buy/sell underlying securities must be exercised at the scheduled date. On the other hand, an options contract gives the buyer the choice of the date if he profits from the trade.

What are Futures?

A futures contract is a type of derivative. This type of a contract involves the buyer and seller agreeing that a certain number of assets will be bought or sold at an agreed price in due course. For agricultural commodities, petroleum, gold, currencies and so on, you can buy futures contracts.

To avoid price fluctuations, futures are of great importance. For example, oil futures are bought by a country that imports oil to protect itself from rising prices in the future. Likewise, as soon as they have sold their harvest, farmers use futures to set prices for their products in order not to risk a price fall.

Types of Futures

Let's see which kinds of futures are based on the underlying asset:

1. Index futures 
   Index futures are contracts whose underlying value is based on an index of stocks.
2. Currency and Commodities Future: 
   Specific quantities of currency can be purchased or sold in a specified time frame through currency futures, also known as Foreign Exchange Futures. 
3. Interest Futures 
   Interest futures are interest rate futures contracts with an underlying asset that pays interest. The buyer and seller shall agree to provide an interest-bearing asset at a specific price in the future.
4. Stock futures 
   These contracts allow you to buy or sell a specific stock group at a specified price on a particular date. Once they have purchased the product, traders are bound to observe the conditions of the contract.

What are Options?

Options contracts are another type of derivative. It differs from a futures contract in that it confers the right to buy and sell an asset at a specific price but does not impose any obligations on the buyer or seller. The two options are a call option and put option. Call options are contracts whereby the buyer is entitled but not required to purchase an asset at a defined price on a specified date.

Put is another type of option that you can use. In this type of contract, the obligations cannot be sold. Instead, the assets can be sold at a fixed price in the future. 

For example, if you own a put option to sell Company ABC shares at Rs 50 at another moment, and the share price increases to Rs 60 before the put option expiration date, you can choose not to sell the share at Rs 50. Additionally, you would not have lost INR 1,000.

Types of Options 

There are two types of options trading: 

1. Call option 

In call options, traders can buy the underlying financial security at an agreed price on the specified date. 

2. Put option 

The put option allows you to sell your underlying financial security on a predetermined date.

Who Should Invest in Futures and Options?

Investing in futures and options is possible for investors who are well aware of the stock market and have a thorough understanding of how to monitor them. In the F&O market, speculation is based on anticipating micro and macroeconomic factors underlying financial instruments. Traders are obliged to estimate whether the market is moving in an upward or downward direction, based on which they enter into contracts with other traders.

Futures and options are used more often by hedgers and speculators. Let's understand hedgers and speculators.

1. Speculators

Traders must have an educated guess about the market and current economic situation in their country and industry when they are speculating. Speculators want to bet at long odds and are not concerned with price stability, in contrast to hedgers. To obtain high profits in selling, the speculator will consider buying at cheaper prices than they are now.

2. Hedgers

In commodity markets, where prices are highly volatile, hedgers can be found regularly. In the event of future price volatility, hedgers intend to protect themselves. To ensure their return on the underlying financial security, they predict the market based on their experience and analysis. But the profits of future traders will be lost if prices rise in the meantime. When they buy an asset, it must be purchased at a price that is fair to the current market value.

Example of Options and Futures Trading

• Example of futures trading

Let us illustrate this with an example. Suppose, on a specific date, you bought a futures contract to buy 100 shares of Company ABC at Rs. 50 per share. You will receive these shares of Rs. 50 at the end of the contract, irrespective of the current prevailing price. If the price goes up to Rs. 60, you're going to get shares of Rs. 50, which means you're going to make a nice profit of Rs. 1,000. However, you will still have to buy them at a value of Rs. 50 each if the stock price drops below Rs. 40. In this scenario, you will lose Rs. 1,000. There are other assets besides equities on which futures can be traded.

• Example of Option Trading

Let's take an example where you have bought a call option to purchase 100 shares of Company ABC for Rs 50 per share on a specific date. However, when the expiry term ends and the share price drops to Rs 40 or below, you lose interest in carrying out the contract because you would lose money. You are then free to decide not to purchase the shares at Rs 50. Therefore, the only thing you will lose on the deal, rather than losing Rs 1,000, will be the considerably smaller premium you paid to enter the contract.

How to Trade in Futures and Options?

Follow the below steps to trade in futures and options.

Step 1: You need to set up an account for buying and selling futures and options contracts to start doing business and learn how to deal with them. 

Step 2: You can log into your account by clicking the login page once you have completed the process of signing up for an account. You can have access to your trading account via an application on a mobile device, or by accessing the website from any computer.

Step 3: To find out what kind of future or option you have and which one will best suit your needs, you can do some research. 

Step 4: Enter the order details when you have chosen an option. To purchase futures and options, the strike price will be applied. The strike price for the put or call options shall be the market value at which those contracts are performed. You'll buy a call or sell a put option if you believe that prices are going to go up or down.

Conclusion  
In the case of leverage, where the entire cost of trading does not have to be paid in advance, futures and options trading is widely practiced. Instead, if the investor keeps a minimum amount of the mark-to-market value in his trading account, the brokerage firm will finance a specified percentage of the whole contract. The investor's profit margins will be significantly increased.   
The risks associated with options and futures trading are considerable, as it is imperative to predict price movements accurately. For a trader, there are various benefits of derivative trading. it is necessary to take complete account of the stock market, essential assets, and the organizations that issue them. Download the BlinkX trading app to start your trading journey in the share market.