Futures and Options: What are they?
Another segment of the Equity market is the Derivatives market, which includes Futures Options trading. They come under safer investment options when compared to the Share market. Futures and Options are financial contracts that take place between buyers and sellers.
There are both potential risks and significant rewards in the Derivative segment. They derive their value from the underlying assets such as Stocks, Bonds, and other Securities. The price of the underlying assets keeps on fluctuating.
Before you make investments in these contracts, you need to conduct an assessment and analysis of the securities you are interested in investing in.
A Futures contract is an agreement between two parties: a buyer and a seller, at a specific future date for a predetermined price. You can trade in the underlying assets such as Stocks, Indices, Commodities, Currency pairs, and so on.
Advantages of Futures Contracts
Here are a few advantages of Futures contracts-
- The Futures market offers greater volatility. In a Futures contract, the underlying asset price tends to keep on fluctuating when compared with Stocks and Bonds. It seems there is a greater risk and greater opportunities to make profits from short-term price fluctuations.
- It offers high leverage. Thus, there is a need for 10%-15% of the underlying asset’s value as margin. But you can avail the contract’s full value as the price movement. In simple words, you can trade more with less money.
- Commission charges are comparatively lesser than other investments.
- It is very liquid. You can complete transactions quickly. Thus, there is reduced market movement between decision and execution.
In an option contract, you will get the right to buy or sell an underlying asset at a predetermined price at a predetermined period. To trade in an Option contract, you must pay a premium. You will get no obligation to exercise the contract. You will get to perform any of the two things-
- Sell the contract at a predetermined period.
- Allow the contract for expiration when not favorable.
In the Derivatives market in India, the most actively traded underlying assets in option contracts are Stock and Indices.
Here are two types of options-
- Call option- Call options are financial contracts where you will get the right but not the obligation to buy a Stock, Bond, Commodity, etc., at a predetermined price within a predetermined period.
- Put option- Put options are financial contracts where you will get the right but are not obligated to sell a stock at a predetermined price on or before a particular date.
Advantages of Options Contracts:
- It is a highly leveraged market. It is a boon for investors who know how to implement leverage in investments.
- You can have unlimited upside with limited downside.
- You can create unique strategies to avail volatility and time decay.
- You can take a position with very low capital.
Futures Options Trading- How to Get Started?
Many platforms offer Futures and Options (F&Os) trading, and Kotak Securities is one of them. Kotak Securities is India’s leading stock brokerage firm that provides different investment opportunities, including Futures Options trading.
Now, all you need to do is open a brokerage account to start Futures Options trading.
Here are five simple steps to open your F&O account within just a few minutes:
- Verify the mobile number and email ID.
- Submit your details like name, address, etc.
- Upload required documents using the Digi Locker.
- Upload your Income proof.
- Provide your digital signature.
Kotak Securities is a subsidiary of Kotak Mahindra Bank Limited, a renowned private-sector bank in India. They have been delivering financial products and services to the diverse customer base of retail and institutional investors for more than 25 years of experience now. They have different trading platforms such as Kotak Stock Trading App, TradeSmart Terminal, Keat Pro X, and Kotak Trade API, and you can choose any one of them at your convenience.
A Futures & Options (F&Os) investment can lead to big profits, but it can also lead to big losses if the Securities do not reach the price level as projected. Investors should understand the underlying assets and market fluctuations before starting Futures Options trading. They can begin by investing in smaller quantities to gain experience and understand this concept well.
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