The investor community in India is always on the lookout for new ways of investing and turning profits. The main goal of investment is to make profits and mitigate potential risks. With this in perspective, investors turn to futures and options in the share market to lessen the risk of trading and investment.

To invest and trade in the share markets in India, investors must open demat account first. After this, they may consider the buying and selling of stocks to earn profits and get into futures and options trading after they have fully grasped the concepts.

Understanding Concepts

What are futures and options in the share market? First of all, before understanding what futures and options are, you should know that they are not just restricted to equity or shares and investment in these assets.

In the simplest terms, futures and options are stock derivatives that can be traded in the financial markets. Both are kinds of contracts or agreements that take place between two parties for trading an index or a stock at a particular price and at a specific date. As the price of the trade is predetermined, these two kinds of derivatives contracts act as safety nets to shield investors against any potential losses affected by price fluctuations. While several investors indulge in entering these contracts through brokers, it is better for investors to completely understand them before they delve into them.

Futures and Options in the Share Market

The contracts that are called futures and options come under the broader term of ‘derivatives’ in the stock market or for any other asset/security market.

It is important to understand that each contract that is entered into has a price or value that is derived (hence ‘derivative’) from the value of the underlying asset that the contract represents.

For instance, you can enter into a futures or options contract where the underlying assets may be particular stock indices, commodities, stocks, or ETFs. Since both these ways of investing are based on contracts that investors agree on, it is important to know the difference between them to know how they function.

Futures and Options - A Comprehensive View

Within the bounds of futures and options contracts and ways to trade in these, there are certain futures trading strategies and options trading strategies. However, understanding the way futures and options work is more important here.

Here are some key parameters on which the differences between futures and options are based to aid you in understanding the concepts and their working better:

Obligation vs. Right

If you enter an options contract to buy or sell a particular underlying asset as specified by a contract, you have the right to fulfil the contract and execute the trade at the specified date, but no obligation to do so, meaning you can opt out of it.

Contrastingly, a futures contract gives you the right to execute the contract, but it also stipulates an obligation to carry it out and is legally binding in this sense.

Trade Dates

Both futures and options contracts have specified dates by which you must fulfil the terms of the contract. However, options contract, although they come with an expiry date, allow you to make your trades any time before the date of expiry, or alternatively, on the expiry date.

In futures contracts, regulations are more stringent as you are bound to carry out your trades (buying or selling assets) on the date specified in the contract.

Nonetheless, in India, in trading in futures and options in the share market, different rules apply to a variety of options trading. For instance, options contracts involving stocks can be executed at any time before the expiry date or on it, but options contracts involving indices may only be executed on the date stipulated in the contract, and not before.

Payments

When you enter a futures contract, there are no costs attached. You must square off trades at the execution date and make certain payments for the contract then. However, to enter an options contract (that is, to buy one), you have to pay a premium that the seller earns in case you choose not to exercise the options contract.

Risks Involved

By now you must have gauged that options involve less of a risk since you can choose not to exercise trades. However, you still have to pay premiums. For futures contracts, deals may prove more risky since you are obligated to carry out trades at a particular date in the face of losses or not.

Evaluate Your Choices

Trading in futures and options in the share market is not without potential risks, and usually, hedgers and speculators who have done their due diligence trade in these contracts.

If you are an investor who can remain within your risk margin, and stick to a strategy like setting up a stop-loss level, you may be ready to trade in futures and options.

You need to have a degree of experience and knowledge, not to mention evaluate your unique goals and risk profile before you trade in futures and options.

Know Everything About the Futures and Options Trading System