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Futures and Options (F&O) - Meaning, Types and Difference

  • Highlights

  • FUTURES AND OPTIONS - MEANING

  • DIFFERENCE BETWEEN FUTURES AND OPTIONS

  • TYPES OF FUTURES AND OPTIONS

Futures and Options (F&O) - Meaning, Types and Difference

Futures and Options (F&O) both are known as “derivative products”. A Future is a contract to buy or sell an underlying stock or other asset at a pre-determined price on a specific date. On the other hand, Options contract gives an opportunity to the investor the right but not the obligation to buy or sell the assets at a specific price on a specific date, known as the expiry date.
Normally we are aware of stocks which are traded directly in the market and are affected by market and economic conditions. However, derivatives are instruments which do not have a value of their own. They are like a bet on the value of existing instruments like stocks or index. Thus, derivatives as the name suggests are indicative of the price of their underlying security as they help you take a position on your opinion of its future price.

 

Uses of Derivatives

The primary purpose of derivatives is to hedge against the price movements of the underlying assets.. Derivatives have an expiry date on which the contract expires. Derivatives don't offer actual ownership of the underlying assets at the expiration of the contract.

  • These contracts are traded on stock exchange and is regulated by the Market Regulator Securities & Exchange Board of India (SEBI).

  • These are treated as financial securities.

  • The markets for derivatives is different in terms of the working system and risk.


Difference between Futures and Options:

Although, Futures and Options, both are referred to as derivatives, they are slightly different from each other.
In Future contract, the buyer has the obligation to buy/sell the assets whereas in Option contract, customer have no obligation to buy or sell the assets.



Basic Terms in F&O

Here are some basic terms that will be helpful to understand F&O.

  • Underlying Security: An underlying security is the primary element of the futures and options through which this derivative contract derives its value.
    It can be a stock, bond, currency, interest rate, index, or commodity on which F&O are based.

  • Strike Price: Strike price is a price at which the options contract owner agrees to buy or sell the underlying asset at the time of exercising the contract.

  • Premium: Premium is the current price (or a fee) of an options agreement paid by the option buyer to the seller. It is quoted on the Exchange as a rule. The higher the volatility of the underlying asset, the higher the premium.

  • Expiry Date: It is the fixed date by which the options must be exercised otherwise it will be expired.


Let’s understand Futures & Options and their Types:


Options

An options contract is the right, and not the obligation, for its buyer to buy or sell the underlying asset at a certain price on or prior to a fixed date. Options are a good way to trade in stocks without owning them.

If the option buyer does not want to buy or sell the underlying asset, they can decide not to do so.

Types of Options

There are two types of options: Call Option & Put Option.

  • Call Options: A Call Option gives buyer/holder the right but not the obligation to buy specified quantity of an underlying asset.

  • Put Options: A Put Option gives buyer/holder the right but not the obligation to sell specified quantity of an underlying asset.


Futures

Futures are contracts which have to be settled (paid for) once you enter into it. If you enter a futures contract, you are obligated to buy or sell the underlying asset at a pre-specified price on or prior to a certain date.

Types of Futures

  • Financial Futures: Stock futures, Currency futures, Index futures, Interest rate futures and others

  • Physical Futures: Commodity futures, Energy Futures, Metal Futures and others



Additional Read:- How To Open Demat Account?

 

What is F&O Trading?

Future and Option are two derivative instruments where the traders buy or sell an underlying asset at a pre-determined price. The trader makes profit if the price rises in case, he has a buy position and if he has a sell position, fall in price is beneficial for him. In the opposite price movement, traders have to bear losses. In the case of futures trading, a trader has to keep a certain percentage of the future value with the broker as margin to take the buy/sell position. To buy an Option Contract, buyer has to pay a premium.

Who Should Invest in Futures and Options?

Future and Option trading though have profit potential but also involves risk in it. This kind of trading may not be for everyone. F&O, both have their own pros and cons.
There are different types of traders who invest in F&O:

  1. Hedgers: Hedgers are those who might get impacted due to price movement of a certain asset and so invests in a derivative contract to hedge of the risks involved with the price movements in an asset.

  2. Speculators: Speculators people who invests in securities purely to take benefit of price fluctuations to draw profit.

  3. Arbitrageurs: Arbitrageurs are those who try to make profit from the difference in the prices of an asset due to market conditions.



Disclaimer

Disclaimer: Investments in securities market are subject to market risk, read all the related documents carefully before investing. Visit our website for other Terms & Conditions.


Stock Broking services are provided by Bajaj Financial Securities Limited which is 100% subsidiary of Bajaj Finance Limited and registered with BSE Ltd. (BSE) and National Stock Exchange of India Limited (NSE)

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