If you are wondering how to trade futures and options in India, you might be one of those who are already into stock trading and would like to explore these financial avenues. Derivatives are complex in nature and a thorough knowledge of these instruments is necessary to do futures and options trading.
Futures and options are part of derivatives trading. These are traded in markets which are much less transparent than other types of stock trading and hence, there is specialized knowledge required as well as considerable risk involved. A derivative is a financial instrument which derives its value from another asset known as underlying. An underlying asset can be another stock, commodity, market index and other things as well. Two main types of derivative instruments are futures and options.
When we talk of options, these involve rights to buy or sell the underlying assets but no necessary obligations to carry them out. Options can be of two types – while a call option is used when one wants to buy an underlying asset, the put option is utilized when someone wants to own the right to sell the underlying asset of a derivative.
When someone wants to buy an options contract, it usually comes with a strike price in India. One can buy or sell the underlying asset at the strike price specified. However, the strike price also comes with a validity date. This specifies the date on which the contract expires. In India an options contract expires on the Thursday of every month.
Futures on the other hand, are contracts that are traded in the market and carry the obligation of actually purchasing the commodity or underlying asset when the contract period expires. Futures are usually involved with commodities like gold, oil, food grains and other types of underlying assets. There is greater risk involved when doing futures trading since the future price movements of underlying assets are involved which brings in greater unpredictability into the trading.
Futures and options are always involved with speculation and hedging activities. While the former is done by investors to gain profits on the price differences that occur over time, the latter is a market strategy deployed to minimize the risks in the price movements of commodities.
These are the various ways futures and options are traded in India and there have been various central level initiatives to provide a more equitable marketplace for such activities.