F&O Trading: Invest in Futures and Options

A derivative is a financial contract whose value is derived from an underlying asset. These could range from equities and bonds to indices and currencies. Two or more parties can trade derivatives either on exchanges or over the counter. 

Futures are derivative contracts where two parties – a buyer and a seller – agree to trade a particular quantity of an underlying asset at a specific price on a particular date in the future. The contract is binding and has to be executed upon expiry. Futures are usually standardized contracts traded on exchanges, just like stocks. 

Options are derivative contracts between two parties where the buyer has the right but no obligation to buy or sell the underlying asset at a specific price on a specified day in the future. The seller, however, has an obligation to execute the contract should the buyer choose to exercise their right. 

The price at which the contract is entered is called the strike price. The buyer also pays a premium to the seller to buy the right to exercise the contract if the market conditions are favourable. This is the compensation paid to the seller to assume the risk of the contract. Another concept to know about in Options trading is the lot size. Every contract has a fixed number of underlying asset units in it. Options are traded based on their lot size. 

Futures are derivative contracts created on an underlying asset at a specific price on a specified future date. Both the buyer and seller have to honour the contract on expiration. On the other hand, options give the buyer the right, but not the obligation, to buy or sell a certain underlying at a specific price on a specified date in future. The buyer can choose whether or not they want to exercise the right. The seller has an obligation to honor the contract. This is the primary difference between the two derivatives. 

Additionally, futures require a higher margin requirement than options. The risks of trading in futures is also higher than options because of the unlimited losses they are exposed to.

Futures contracts are standardized derivative contracts between two parties where they are obligated to buy or sell an underlying asset at a particular price on a specified day in future. Futures are traded on exchanges, just like stocks. To trade in futures, you need to have a broking account with a verified brokerage in the country. Once you have the broking account, you can begin trading in futures.

The biggest advantages of futures contracts are:

• They are standardized contracts that are traded on exchanges. 
• Due to this, they have high liquidity. 
• They have stable margin requirements that are known in advance. 
• When it comes to options, the value of the contract declines over time. This is called the time decay of money. Since futures contracts are fixed in advance, there is no time decay to worry about. 
• Futures can be used to hedge against price risks. 

• Futures contracts are standardized derivatives contracts that can be traded on exchanges. 
• They are available on several underlying assets such as stocks, indices, commodities, currencies, fixed income instruments, etc. 
• You need to deposit a margin amount to trade in futures. 
• Futures contracts have high liquidity. 
• They can be used to hedge against price risks.

All futures contracts are settled in cash. The closing price of a Futures contract is the final settlement price. 

• Buy call options
• Sell call options
• Buy put options
• Sell put options

Call and put buyers have the right but not the obligation to buy or sell the underlying. The risks of buying call and put options are limited to the premium paid. However, call and put sellers have an obligation to honour the contract. The premium is the compensation they get for assuming the risk

Trading on Indian stock exchanges takes place on all weekdays, except on Saturdays, Sundays and other holidays announced by the exchanges. There are different timings applicable to the different segments. They are as follows:

• Equity and derivatives (Futures & Options) - 9:15 to 3:30 pm normal trading session
• Currency Derivatives - 9:00 am to 5:00 pm
• Agri-commodities - 9:00 am to 5:00 pm
• Other commodities (bullion, metals, energy) - 9:00 am to 11:30 pm (up to 11:55 pm between November and March)