Futures and Options: A Beginner’s Guide
Futures and Options: A Beginner’s Guide
Blog Article
Futures and options (F&O) are popular financial derivatives that allow traders and investors to hedge risks, speculate on price movements, and enhance portfolio performance. While both serve similar purposes, they have distinct characteristics.
What Are Futures?
A futures contract is an agreement to buy or sell an asset at a predetermined price on a specified future date. These contracts are standardized and traded on exchanges.
Key Features of Futures
- Obligatory Execution: The buyer and seller must fulfill the contract upon expiry.
- Leverage: Traders can take large positions with a small margin.
- High Risk & Reward: Due to leverage, profits and losses can be significant.
Example of a Futures Trade
A trader expects crude oil prices to rise from $80 to $90 per barrel. They buy a futures contract at $80. If the price reaches $90, they profit. If it drops, they incur a loss.
What Are Options?
An options contract gives the buyer the right (but not the obligation) to buy (call option) or sell (put option) an asset at a predetermined price before or on a specific date.
Key Features of Options
- Right, Not Obligation: The buyer can choose to exercise the option or let it expire.
- Limited Risk: The buyer’s loss is limited to the premium paid.
- Versatile Strategies: Used for hedging, income generation, or speculation.
Example of an Options Trade
A trader buys a call option on a stock at ₹1,000 with a premium of ₹50. If the stock rises to ₹1,200, the trader profits. If the price falls below ₹1,000, the maximum loss is the ₹50 premium.
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