In recent years, online trading has been boosted by thousands of traders who seem to have grown over time. Now, traders tend to do futures and options through online brokers. In the following article, you can understand options vs futures trading through the following points. This is because of the many advantages which they offer such as lower risk, leveraged hedge portfolios etc.
Futures and options are a type of derivative, which is an instrument whose value depends upon an asset which is held in the stock market. The underlying asset can be stocks, indices, currencies , commodities etc. So, in short you can do a contract deal with any financial instrument available in the market.
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Options vs Futures
To elaborate on options vs futures , you already know that these are standard agreements that are traded on stock exchanges such as NSE, or BSE in India. Both options and future contracts are executed on the expiry date, but with the options contract, you can choose whether or not you wish to engage in the transaction. Trading futures requires the trader to open a margin account with an initial amount from the stock broker and settle their contracts daily. In contrast, only option selling demands the same. These can help traders mitigate risk and diversify their financial portfolios.
State the Difference Between Options And Future Trading
A futures contract is a contract which gives parties the right as well as the obligation to buy or sell a particular asset. This is done according to the regulations of the stock exchange. One of the differences between options and futures traders can be understood by the following example:
Consider the following futures contract in which the share price of XYZ company is trading at Rs. 100/- and then increases in the future.So knowing these possibilities, you will grab the opportunity to buy 1,000 shares at the current price. So when the price of XYZ company stocks goes up, assume up to Rs.150/-, then you can exercise your right, and sell your futures at Rs.150 each and make a profit of 50x1000, which is Rs.50,000/-. And if the trade goes sideways then you will face a loss according to the current price of the XYZ stocks.
In the case of an options trade, you have no obligation to buy or sell the following assets. As per the above futures scenario, you can do the following trade of XYZ stock with the same amount of shares and make a similar profit. But unlike the futures trade, you are not bound to execute trades in the time of losses. So, if you suffer significant losses, unlike futures, you can avoid exercising your right and exit trading by only paying the premium required to purchase the contract from the seller.SYou can say that this point is the major point for the options vs futures difference. You can trade futures and options contracts in the following lot, so you cannot trade in a single share. As per the stock exchange determines the size of the lots, can differ from share to share. Our options calculator is a powerful tool that can help you make informed decisions about your options trading.
Important Terms of Options and Futures
For both options and futures, there are particular terms which you must know. In options trading, you need to know about put and call options. A put option gives the right to sell a financial asset at a given price. The call option, on the other hand, grants the holder the right to purchase financial assets at a specified price.
You must also ensure that an option contract comes with a limited time period. At this time period, you need to execute the following trade or else it will become void. As a futures contract, the futures also have their own terminology, which is the exercise price or the futures price of the asset that would be paid in the future..Buying an item in the future indicates that the buyer has gone long, and the person telling the future contracts is known as a short.
Who Trades Futures?
A futures market serves commodity producers, the commodity trader uses futures contracts to speculate on their trade. A futures contract can protect buyers as well as the sellers from wide price swings that happen in the underlying assets. There are both institutional traders and retail traders who seek to profit from the expected or unexpected changes in the futures prices. Our options calculator can help you with a variety of options trading tasks, such as calculating option prices, determining breakeven points, and assessing risk.
Margins and Premiums
Another important aspect of the futures vs options topic is the margin and premiums. The margin is the amount you have to pay to the broker when buying a futures contract. The margin can be different for different assets and it is generally a percentage of the total trades that you make in the future. It is used by the broker as protection against losses which can happen in the following trade. The premium, on the other hand, is a fee you pay the option writer for buying an option contract.
In a high volume of trade, both margin and a premium are used for leverage.. In this case, 10% of the trade is Rs. 10,000, which is what you must pay to the broker.Here the 10% of the trade is Rs.10,000/- and this you have to pay to the broker. So by paying just Rs.10,000/-, you will enter into a transaction of Rs.1 lakh rupees. This increases a trader's exposure and even his or her chances of profit.
There are straight benefits to your trading, so when you invest in stocks you may need to add complete funds, but in the futures you only need a small percentage of your overall trade. But that said there is also risk if the trade goes sideways, as you can face heavy losses.
And when the price falls, you get a margin call from the broker to deposit more money to fulfil the unexpected requirement.. This occurs because futures gains are market-to-market each day, which simply means that the value of the future can change according to the market.
At last, the settlement of trade happens in two ways. Futures or options can be used. One way is to execute a trade on its expiry date either through delivery of shares or cash. You can also do it before the expiration date. You can do another thing, that you can square off a futures contract by buying another identical contract. You can do this for the option contract too.
Futures and options are used for exploring better trading strategies. As the stock market is highly volatile in nature, traders, producers, and investors use this contract to reduce risk and trade smartly. Speculators use derivatives contracts to profit on price movements. As traders price movements accurately, they can make money in the following derivatives trade. In the realm of futures and options, it's essential to know the difference between bulk and block deals, as these terms pertain to significant transactions in the stock market. Additionally, explore the difference between intraday and positional trading with Share India to enhance your knowledge of various trading approaches and make informed investment decisions.
Frequently Asked Questions (FAQs)
Call option: It gives the right to buy an asset at a specific price and date.
Put option: It gives the right to sell an asset at a specific price and date.