Derivates are nifty and protect you against price fluctuations. You will find that there are two types of derivatives namely, futures and options. Aside from protecting against price fluctuations, they can also be traded on exchanges such as commodities, currencies, and stocks. For index or stock trading futures and options are contracts between two parties at a particular level or price at a future date. While most investors and traders, trade in future and option through a trader, it is integral to know about these two derivatives in detail.
So, in this article, we will give you an overview of options and futures and futures and options trading. So, let’s get the basics clear before delving deep into options and futures trading.
What are futures and options?
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Options
Options are the type of derivatives that are built on an underlying security’s value, such as stocks. An options contract allows an individual to sell or buy an asset at a particular price while the options contract is still ongoing. Investors are not compelled to buy or sell an asset if they decide not to. Options do not entitle underlying investments’ actual ownership until the contract or agreement is finalized. However, there can be proposals for buying or selling the shares.
There are two types of options: put options and call options. Call options represent an offer for buying a stock before the expiration of the agreement at the strike price. On the other hand, in put options, investors sell stocks at the strike price.
In options, the trade volume and open interest are of supreme value. Trading volume is the number of contracts or shares traded in a specific period. The options volume gives you an apt insight of the current price movement and its strength. Options trading volume is an indicator of the present interest.
Consequently, open interest options refer to the number of active contracts. Generally, open interest appears alongside bid price, volume, ask price, and implied volatility in option quote displays. If an investor overlooks open interest, he is ought to face the consequences. The open interest provides the trader with fundamental information regarding the option’s liquidity.
Option trading strategies include buying calls, buying puts, covered calls, protective puts, long straddle strategy, long strangle strategy, to name a few. A comprehensive future and option trading course will be the key to explaining all these strategies minutely.
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Futures
A futures contract or futures is the obligation of buying or selling assets at a designated price at a later date. If you consider futures contracts from the perspective of commodities such as corn or oil, they are true hedge investments. Unlike options, future contracts are uniform, with an identical set of rules for buyers and sellers.
Futures hold maximum liability to both sellers and buyers. As the basal share price moves, any one of the parties of the agreement need to deposit more money to attain a daily obligation, into their trading accounts. The reason behind this profits on futures is automatically transferred to the parties’ future accounts at every trading day’s end.
Just like options, there is a myriad of futures trading strategies. The pull-back strategy, trading the range, breakout trading, fundamental trading strategy, trend-following are some of the best future trading strategies.
How can you invest in futures and options?
Options and futures traders need a brokerage account for trading in futures and options. The favourable route to options and futures trading is to open a brokerage account under any broker who is going to trade on your behalf.
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Stock Market Derivative Trading
Traders can trade in options and futures at the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). The NSE recognizes futures and options trade in nine major indices and over hundred securities. Futures tend to move faster than options since they have a greater degree of leverage. The duration for a futures contract is three months. In a futures and options transaction, a trader will essentially pay the difference between the market price and the agreed-upon price. Therefore, a trader does not have to pay the real price of the underlying asset.
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Commodities Derivative Trading
Options and futures trading are also popular in commodities exchanges like the Multi Commodity Exchange or MCX and National Commodity and Derivatives Exchange Limited (NCDEX). Due to the high volatility of commodities exchange markets, you will find sturdy derivative trading. Traders protect themselves from prospective price fluctuation using futures and options on commodities. Subsequently, it also allows traders to make gains from commodities which are anticipated for a future spike. Options and futures trading in the stock market is not unlikely. However, for trading in the commodity markets, traders need a tab bit of more expertise.
With a futures and options trading course, you can gain expertise to trade in both the stock market and commodity market. Future and option trading requires a commitment to track the stock market and a knowledge of its nuances. So, with a course, you will get a comprehensive knowledge of the principles of derivatives and all the other essential features of derivatives trading.
Who can invest in futures and options?
Due to strong speculation in derivative trading, hedgers and speculators trade in options and futures.
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Hedgers
The driving force here is insulating against futures price volatility. Most of the hedgers are found in the commodities market, where prices fluctuate quickly. Futures and options trading then provide traders with the much-needed price stability under such circumstances.
When hedgers hedge their bets on such a dynamic market, they confirm returns on the underlying asset. Profits can be lost, though, if the price increases in the interim. Correspondingly, they have to buy an asset at a fixed price, regardless of its market value.
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Speculators
A large part of derivatives trading involves speculation since traders agree to trade at a fixed price. Hedgers look for a steady price. Contrary to that, speculators bet against the long odds. So, speculators intricately study the market, its patterns, follow the news, and then make an educated and calculated guess at a price. Hence, a speculator looks for a lower price asset for buying while hypothesizing on higher returns and price in the long run.
The Best Beginner’s Course to Futures and Options Trading
Futures and Options are always considered as the mystifying cousins of equity trading. Future and option trading is not rocket science, but it does need a thorough understanding of the fundamentals.
So, we have hand-picked the best futures and options trading course for you, “Beginners Guide to the Futures and Options” at Elearnmarkets. This course aims to arm you with an apprehension of derivatives principles. In this course, you will assimilate the fundamentals of derivatives, futures, and options, open interest, hedging risk, put and call options, and the requisite skills for options and futures trading. The course consists of self-paced recorded lectures with three chapters on derivatives, futures, and options. On completion of this course, you will get a crystal clear on derivatives and how to successfully and carefully trade on options and futures, respectively.
Elearnmarkets is an Indian e-learning platform. This platform aims to spread financial literacy and has thousands of courses and webinars on topics such as the basics of stock markets, technical analysis, derivatives, mutual funds, and cryptocurrency. If you are looking for holistic learning, then Elearnmarkets is your ultimate destination.
Takeaway
The market of futures and options can fluctuate substantially. With options and futures trading, traders aim to gain quick returns. Managing these investments in a planned manner allows traders to protect themselves against a volatile market while gradually increasing their returns. If you can hedge your bets and speculate quite accurately, then futures and options trading is ideal for you.
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