If there’s one thing certain about commodity and financial markets, it’s that they change their prices. Prices are constantly changing constantly. They can fluctuate between up and down according to many factors, including the economic situation and weather conditions production of agricultural products and results from elections, coups and wars as well as policies of the government. The list of possible causes is endless.
Naturally, people trading in these markets are likely to be worried about price volatility, since price changes can lead to loss or even profits. To ensure their safety the market, they use derivatives, such as futures and options. The term “derivative” refers to a type of contract that derives its value from the underlying assets. The base assets may comprise the stocks of a company, commodities,currency, and more.
What are the futures and alternatives? Let’s look.
What are Futures?
A type of derivative that is called a futures contract. In this kind of contract it is the case that a seller or buyer (or seller) is able to purchase (or sell) an amount of a specific asset at a certain price, at a specific date in the future.
Let’s demonstrate this using an illustration. Imagine that you purchased an option to purchase 100 shares in Company ABC at Rs 50 each , at a particular date. After the expiration of the contract, you’ll receive those shares at priced at Rs 50, regardless of the current price. If the price rises up to 60 dollars and you receive the shares for just Rs 50 that is a an impressive profit of Rs 1,000. If the share price decreases to around 40 rupees, however you’ll have to buy them for 50 each. In this case, you’ll be losing $1,000! There is a variety of option for futures contracts. There are many other assets accessible. You can purchase futures contracts for petroleum, agricultural commodities and gold, currencies, etc.
Futures can be extremely beneficial in helping protect against the threat of price fluctuation. A country that imports oil, for instance will purchase oil futures to protect its self from price hikes in the near future. Farmers will also secure prices for their crops using futures contracts to ensure that they do not be at risk of a decline in price when they’re getting ready to sell their crops.
What’s the the alternatives?
Another type of derivative is the option contract. It differs from a futures contract , in that it grants buyers (or sellers) either the the right but it does not impose an duty to purchase (or sell) an asset at a specific price on the time of a pre-determined date.
There are two kinds of options that are available: The call option and the put option Call options are an agreement that grants the buyer the option however not the obligation to purchase an asset at a certain price at a certain date. Let’s say that you bought an option to purchase 100 shares from Company ABC at Rs 50 per share on a specific date. The price of the shares falls to around 40 rupees below the the period of expiry which means that you don’t have any desire to go through with the contract since you’ll be losing money. This means that you are entitled not to purchase the shares at a price of Rs 50. So instead of losing 1,000 your only loss will be the amount you pay for the right to sign this contract. This is considerably smaller.
Another option type includes the put choice. With this type option, you may sell assets at a predetermined price in the near future, however, you are not bound to. For example, if you are granted put options for selling shares from Company ABC at Rs 50 in the future, and shares prices increase to Rs 60 prior to when the date expires, then you can choose to avoid selling the shares at fifty rupees. Thus, you’d be able to avoid a loss of $1,000.
What’s the difference between future as well as option trade?
One benefit of options and futures is the freedom to trade them on various exchanges. E.g. you can trade stocks options and futures on exchanges for stocks, commodities on commodity exchanges and the list goes on. When you are learning about F&O trading it’s important to realize that you can trade F&O without the possession of the asset that is used to make it. Although you might not be looking to purchase gold but you are able to benefit from the price fluctuations in commodities through investing into the gold market through options, futures as well as options. It will require much less capital to make money from these price fluctuations.
F&O the trading on the market for stocks
Many are not aware about options and futures on the market. However, they’ve become more popular in recent times, so it’s advantageous to know more about them.
The National Stock Exchange (NSE) introduced index derivatives based on the Nifty benchmark Nifty 50 index in 2000. Today, investors can place your bets on options and futures in nine major indices as well as greater than 100 stocks. You can trade futures and options on an exchange called the Bombay Stock Exchange (BSE)
The major benefit of choosing to invest in futures and options is that you do not have to invest money in the actual asset. The only requirement is to pay a minimum margin to the broker to trade. For instance, let us assume that the margin is 10 percent. If you wish to purchase futures on stocks worth 10, 000, then you could pay one thousand to the broker as margin money. More volume means that your chance of earning a profit are greater. However, the risk is greater if share prices do not move in the direction you’d like, and you be left with massive losses.
Options carry less risk because you are able to decide not to use them if prices don’t change according to the way you’d like. The only drawback is the cost you have to pay to purchase the option. When you are aware of what’s F&O in the the share market you can profit by using it, and lower your risk.
Commodities and Futures: Options, futures
Options and futures in the commodities are another option for investors. The downside is that the markets for commodities can be volatile, which is why it’s best to explore the market only if you’re able to accept a substantial level of risk. Because margins are less in the case of commodities, there’s the potential for a lot of leverage. Leverage could provide more opportunities to make money, but the risk is proportionally higher.
It is possible to trade commodities futures and options on commodity exchanges such as those of the Multi Commodity Exchange ( MCX) and the National Commodity and Derivatives Exchange Limited (NCDEX) in India.
It is important to understand what options and futures are because they play a crucial financial function in the world. They are a hedge against price volatility and guarantee that markets are in a state of liquidity. A smart investor could also gain from taking a position in the derivatives.