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| What Is The Difference Between Futures And Options? |
Futures vs options: which is better?
Over the years, futures and options have become very popular with investors, especially in the stock market. The reason for this is that they offer many benefits - low risk, leverage, and high liquidity.
Prices can be volatile and cause losses for producers, traders, and investors. So, these derivatives can serve to hedge against such volatility. Speculators use derivatives to capitalize on price movements. If they can accurately predict price movements, they can make money through such derivatives.
Difference between futures and options
A future is a contract that gives the holder the right to buy or sell a certain asset at a specific price at a specified future date.
An illustration will help you find out. First, let's look at futures. Suppose you think ABC Corp's share price, currently Rs 100, is going to go up. So, you buy 1,000 futures contracts of ABC Corp at a price of 100 rupees (`` strike price '').
Remember that options give you the right, not the right to buy or sell. If you have purchased similar options on ABC Corp, you will be able to exercise your right to sell the option for Rs 150 and earn a profit of Rs 50,000, just like a futures contract. However, if the share price falls to Rs 50, you will have the option of not exercising your right, thus a loss of Rs 50,000 can be avoided. However, these derivatives are not available for all securities, but only for a specified list of approximately 200 shares. There are lots of futures and options available, so you cannot trade in one share. The stock exchange determines the size of the lot, which varies from stock to stock. Futures contracts are available for a period of one, two and three months.
Types of options
As far as futures contracts are concerned, there is only one primary type. However, you have more options when it comes to option contracts. There are two types:
Call option: It gives you the right to buy a property at a specific price on a certain date.
Put Option: It gives you the right to sell the property at a fixed price at a future date.
The call and put options are used in various situations. Call options are preferred when prices are expected to rise.
Margin and premium
You have to pay a margin when entering a futures contract, and a premium when purchasing an option.
An example should help illustrate this better. Suppose you want to buy futures of 1 crore rupees. If the margin is 10 percent, then you have to pay only Rs 10 lakh to the broker. So by paying just Rs 10 lakh, you will be able to do a transaction of Rs 1 crore. This increased performance will increase your chances of making a profit.
On the other hand, if you had invested Rs 10 lakh indirect shares, you would have got only Rs 1 lakh.
If prices fall by 10 percent, your futures investment will lose Rs 10 lakh.
The reason for this is that gains are marked in the futures market every day.
This means that changes in the value of futures, whether up or down, are transferred to the futures holder's account at the end of each trading day.
If you do not pay the margin call, the broker may sell your position, and this can cause a huge loss for you.
As far as options go, your risks will be significantly lower, as you have the option of not using your contract when prices are not that way.
In that case, the only loss will be the premium you paid.
So while trading futures versus options, you can say that options involve less risk.
In the case of options, while the buyer carries limited risk, the seller's risk is unlimited.
However, the author has the option to repay the transaction by purchasing a similar option contract.
Typically, options writing is best done by experienced people who can estimate the amount of risk involved, and save their fingers from burning.
There are two ways to settle futures and options.
One is to do this on the expiry date, either through the physical delivery of shares or in cash.
You can do this before the closing date by closing the transaction.
This option can also be done for contracts.
As we have seen above, futures involve more risk because you have to bear the brunt of any change in price.
But saying that, the probability of making money from futures is more than that of options.
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