Future and Options Trading: All You Need to Know - IIFL



Future and Options Trading: All You Need to Know

Future and options are stock derivatives in which the traders agree to sell or buy a share at a predetermined price on a future date.

Written by Web Desk Team | Published :December 29, 2022 , 9:01 am IST

Future and options are stock derivatives in which the traders agree to sell or buy a share at a predetermined price on a future date. The trader makes a profit if the prices rise in case they bought a position. In contrast, a dip in the stock prices will be a favourable situation if they chose to sell a position. Opposite price movements than the predicted trend will result in a loss for the trader. Both trades derive value from an underlying asset that may be shares, commodities, exchange-traded funds (ETFs), and indexes among others. While the two are twin stock derivatives, they also have some differences. For example, a future trade is a commitment that the position must be squared off on the specified date. In contrast, positions give the buyer the right, but not the obligation, to exercise the contract.

In future trades, you can exercise some options any time you want till the expiration date. However, in options trade, this rule may not always be applicable. For example, an index option can only be exercised on expiry whereas a stock option can be exercised before the expiration date.
Another key difference between the two is that there is no upfront payment in future trading and the trader only requires the margin, a percentage of the value of the trade. In contrast, the option requires the trader to pay a premium.

A call option in future trade allows the trader to buy the underlying asset at a specific date. In the put option, the trader has to sell the asset on a specified date. In both cases, the trade is always optional. You can choose not to utilise your call or put an option if the prices do not suit you.
The seller of the option earns this premium. If the buyer chooses to exercise the option, they will lose the premium.

To trade in future and options, all you need is a Demat and trading account. Future and options trading is based on margin. To trade in them, the trader has to pay up only a margin of the total trade value. For example, to perform a trade of Rs 1 lakh value with a margin of 20 per cent, the trader will be needed to pay up to Rs 20,000. In case the buyer has taken buying positing and the price of the underlying asset moves up, the trader can square off to book the profit before the expiration date. This type of trade offers a higher leverage of profit and is risky.

The trades in future and options require certain expertise and understanding of how the stock market works. The trade is far more speculative in nature than a usual share transaction. Hence, it may not be suitable for someone who is just stepping into the trading business. After thorough research on markets and new events that could impact trading, speculators make an informed guess.
So it’s important to learn the nuances of the stock market first before entering into the future and options trading segment. These days there are many online platforms like www.5paisa.com where you can gain enough knowledge about stock trading. To get detailed information about future and options trading log on to: https://www.5paisa.com/demat-account

A speculator’s eyes buy at a low price in the short term while speculating on higher returns in the long run. Similarly, it is also preferred by hedgers as a shield against future price volatility. Commodity trade, where most hedgers work, can fluctuate quickly, trading in future and options offers diversification volatility. By hedging in the future and options trading, hedgers look to secure returns. In case the price goes up, they stand a chance to lose the profit. Before delving into future and options trading, the investor assesses their risk appetite and sets up a stop loss or profit level. Future and options are fast-moving trades where the margin fluctuates daily. It is ideally meant for traders who are looking for a quick return instead of long-term investments.

Future and options trading is speculative in nature where the traders agree to trade at a fixed price in future. Hence, they are often preferred by traders who want to bet on a stock depending on market speculations.