By Dipesh T Patel February 27, 2023

Futures and options are the parts of the derivative market in the Indian Stock market. Apart from these, there are two other parts of derivatives: forwards and Swaps. That we shall learn in another article; here, we focus on the most commonly used financial instruments of derivatives: futures and options.

Futures:

In simple language, it is the contract between two parties to buy or sell the underlying asset at a fixed time and fixed price in the future. There are four types of futures contracts: Index Futures, Stock Futures, currency and commodities future and interest futures contracts. These are standardized contracts and can be traded on the exchange boards.

Terms you will come across while dealing with future contracts:

Below are the most widely used terms for future contracts; you must know them.

1. Type of the instruments: The underlying asset mentioned in the futures contract or agreement becomes the instrument. Suppose you are trading stock with the help of future contracts; then the instrument type will be – “Stock Futures”.
2. Lot size: Futures are not traded for a single share; instead, there are fixed sizes. For example, TATA250 means when you are dealing in one future contract of TATA, you are trading 250 shares of TATA. 2 future contracts will represent 500 shares and likewise.
3. Underlying value: This is the value of the underlying asset.
4. Expiry date: This is when the contracts expire and have no value. In India, the expiry day for futures is on the last Thursday of every month. If there is a holiday on the previous Thursday, it will expire one day before, and that is last Wednesday.

I hope you are clear about the basics of the future. When you want to start trading in the future, you can always take the help of Future Trading Software available for the Indian stock market to build Future Trading Strategies. Please remember some will come for free, while some software’s will require monthly or yearly payment.

Let us now move to understand what options are

Options contracts: These are also a part of derivative contracts majorly used for hedging. In this type of contract, the buyer and seller have the authority to buy/sell the underlying asset at a predetermined price and time, but at the same time, they are not obliged to do so. Two major types of options contracts are Call options and Put options. Today, Option Strategy Builder Software in the market has made trading options more accessible.

1. Call options: With the help of the call options, the contract holder has the right to buy the underlying asset at a fixed price and time but is not obliged to buy.
2. Put options: With the help of Put options contracts, the contract holder has the right to sell the underlying asset at a predetermined price and time but is not obligated to sell.

Terms you will come across while dealing in the options contracts:

1. Underlying price: This is the value of the option contract
2. Option expiry: This is the day the option contracts expire and possess no value. All the options contracts expire on the Last Thursday of every month. In case of a holiday, they expire one day before last Thursday.
3. Premium: This is the small amount a trader must pay to enter the agreement.
4. Strike price: This is the price on which the contract will be executed on its expiry day.

Coming to the most crucial aspect of futures and options trading, who can invest in F&O Contracts:

Although they have a huge profit potential, dealing in the future and options is not everybody’s cup of tea. It is not for everyone. There are three traders who are generally in the F&O segment.

1. Hedgers: when the traders find the potential risk in the underlying stock, they invest in the options contract to get protection against the price movement risk.
2. Speculators: These are the traders who believe in taking high risks. They especially invest in options contracts to gain the advantage of the price fluctuations of the underlying asset.
3. Arbitrageurs: These are the traders who take advantage of the price difference of the same underlying asset in two different markets.

Final thoughts

● Both the options and futures are the types of the derivative segment, and they derive their value from the price fluctuations of the underlying asset.

● Options contracts offer the right to sell or buy the underlying asset but are not obliged to do so on the predetermined date and price.

● While dealing in the futures, it is obligatory to execute the contract; the buyer has to buy, and the seller has to sell the underlying asset on a specific future date.

● A trader can close his position before the expiry of the contract, but in future contracts, the delivery will only take place on the expiry date.

So, this was just the basics of the options and futures contracts. It is a vast concept; keep learning. If you want to know more, you can always contact is at mobile 9909978783 learn from those with 15 years of experience in this field. Get certified and start trading in the derivative sector. For any queries about the software you can email us at support@talkdelta.freshdesk.com and book demo for free online from our website and our executive will contact you as early as possibleDipesh T Patel is an experience content writer having vast experience in writing articles of various fields like finance, health, technology, Education and many more. Read this article about Future Trading Software and understanding future and option trading contract . Know about Option Strategy Builder Software which help you to build options and Future Trading Strategies in Indian stock market.

sooperarticles.com