Futures and Options Trading

An Overview of Derivative Trading

The future and options trading is also known as derivative trading. After its introduction in year 2000, it has become quite popular in India and has grown many times. By definition, derivatives are financial contracts that derive their value from an underlying asset. The said assets could be stocks, indices, commodities, currencies, and exchange rate or the rate of interest.

The financial instruments under derivative class let a trader to earn profit by taking position on the future value of an underlying asset. As the value has been derived from an underlying asset, hence, these types of contracts are called ‘Derivatives’.

There are primarily four types of derivative contracts in which trading happens. They are forward, futures, options and swaps. However, the bulk of derivative trading in India occurs in futures and options.

Introduction to Futures and Options Trading
Futures

The futures are financial agreements obligate a purchaser to buy an asset or the seller to sell an asset, such as a physical commodity or a financial instrument determined at a future time and cost.

Options

An option provides the right to a buyer but not the obligation to purchase (or sell) the particular assets on the particular time period and definite cost.

In a simple word, if a trader purchase or hold a stock option contract, it provides you the “right”, but not the “obligation”, to purchase or sell shares or stock at a “predefined price” on or before a specified “date” (time duration). After this date, a contract expires and your option finishes in the stock market.

There, two types of options are allowed for a trader to practice in the market.
Call Option

This option provides its buyer the right but not the obligation to “buy” shares at the specified price on or before a defined date.

Put Options

This option provides its buyer the right but not the obligation to “sell” shares at the specified price on or before a defined date.

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Types of Futures and Options Trading

Among all the underlying assets covered under future and options, the most major one, where, the trading is being done extensively is indexes and stocks. Below is mentioned various distinguished features of index and future based trading in Futures & Options.

Index Based Futures

Futures contracts on a stock or financial index are called index futures. For all indexes, there may be several multiples for deciding the cost of the futures contract. The primary indexes under which trading happens in futures in BSE and NSE as follow: –

  • NSE CNX Nifty Index, CNX IT Index, Bank Nifty Index, Nifty Midcap 50 Index, CNX Infrastructure Index and CNX PSE Index.

  • BSE Sensex, BSE 100, BSE TECK, BANKEX

Index-Based Options

An Index option is a financial derivative that provides the holder the right, but not the obligation to purchase and sell the value of an underlying index. Below is mentioned, the list of indexes:-

  • NSE CNX Nifty Index, CNX IT Index, Bank Nifty Index, Nifty Midcap 50 Index, CNX Infrastructure Index and CNX PSE Index.

  • BSE Sensex, BSE 100, BSE TECK, BANKEX

Individual Stock Options

A stock option is an opportunity, sold by one party to another that provides the purchaser the right, but not the obligation to purchase or sell a stock at a determined cost within a definite future time. Stock exchanges present F&O contracts for individual scripts (i.e. Reliance, TCS, HDFC Bank, etc.) which are buying and selling in the Capital Market sector of the Exchange.

NSE offers F&O trading in 147 securities predetermined by the SEBI. The stock exchange regulates the different characteristics of the Futures & Option contracts including underlying security, market lot and the maturity date of the contract.

Individual Stock Futures

Single-Stock Future (SSF) is a sort of futures contract among two people to exchange a particular quantity of shares (Lot) in an organization for a price agreed nowadays (the futures charge or the strike price) with delivering occurring at a selected future date, the delivery date.

Some of the Benefits Offered by Futures and Options Trading Include:-

  • Leverage

  • Diversification

  • Liquidity

  • Opportunity

  • Price Availability

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In order to do online stock trading with Trainers Stocks feel free to contact us at Toll Free :info@trainersstocks.com