What is meant by futures and options contracts and difference between them ?

Posted by Epicram on August 30th, 2017

Futures contracts

Futures contracts are basically an agreement between two parties i.e a buyer and a seller where both the parties agrees to buy/sell a particular asset at pre decided price and time.There are times when a buyer does not have money to buy a particular asset at present but he has the potential to buy it at some future date so he can do so buy buying a future contract of that asset. All futures contracts are standardized and therefore they are traded over the exchange freely without having any counter party risk.For better results experts suggested futures trading tips, mcx tips are also followed by traders and investors. Every contract has its own specifications which both the parties has to fulfill. Participants of futures contracts may not know each other in most of the cases.

Trading in assets like stocks, indices, currency pairs, commodities can be done using this contract. Among all mostly traders prefer to trade in futures contracts of stocks and commodities.Trading using these contracts is done to hedge against future price risk mostly. In nutshell traders try to take benefit from price difference between cash and future market. As they buy at low price in cash market and then sell it at a high price in future market.

 

Options contracts

An option is a type of security traders can buy/sell at pre decided price over a specified time period. To enter in any option contract initially a premium amount has to be paid which varies for different contracts. Here there is no obligation which has to be fulfilled.

Options are of two types primarily:

Call Option: It issues buyer right but do not put any obligation to buy an asset at some particular date at pre decided price over a specified time period.

Put Option: It issues seller right but do not put any obligation to sell an asset at some particular date at pre decided price over a specified time period.

 

Few difference between options and futures are discussed below:

1) In futures buyer and seller are obliged to fulfill the contract specifications but this is not the case with options contracts. There is not obligation on buyer/seller.

2) Margin money is higher in futures contracts.

3) Participants of futures are speculators and arbitrageurs and in options are hedgers.

4) In futures loss and profit is unlimited. In case of options contracts loss if in-case then only premium amount which has paid will be the loss.

 

Futures and options offers several benefits to traders but do not began to trade in this market blindly. Firstly gain sufficient knowledge about market and understand its different terminologies as trading in options is bit difficult . Use of financial advisory services is also a way to ensure your good earning from market. Such service providers consists of team of qualified market experts with very good market knowledge and recommends trading tips after carefully understanding market conditions.

 

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