Futures and Options Explained: Derivatives Trading in India

What are Futures and Options in the stock market?

Futures and Options (F&O) are types of derivatives, which are financial contracts whose value is based on an underlying asset like a stock, index, or commodity.
These are used for trading, hedging risk, or speculation and are traded on stock exchanges like NSE and BSE in India.

🔹 Futures

  1. A Futures contract is an agreement to buy or sell an asset at a fixed price on a specific future date.
  2. You don't need to pay the full amount upfront just a margin.
  3. Profits or losses are settled daily (mark-to-market).
  4. Futures are obligatory, meaning you must settle the contract on expiry unless you square off earlier.
Example:
You buy a Nifty futures contract at ₹22,000 for expiry next month. If Nifty goes up to ₹22,300, you gain the difference.

🔸 Options

  1. An Options contract gives you the right (but not the obligation) to buy or sell an asset at a specific price before or on the expiry date.
  2. There are two types: Call Option (buy) and Put Option (sell).
  3. You pay a premium to enter the contract.
  4. You can exit before expiry to book profit or limit loss.
Example:
You buy a Reliance ₹2,500 Call Option by paying ₹50 premium. If Reliance goes to ₹2,600, the value of your option goes up.

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