InvestorQ : How can I make profits using futures and options in the market?
Anamika Sodhani made post

How can I make profits using futures and options in the market?

Archita Jajjoo answered.
2 years ago

Futures and options have been around for a long time. In India, they really took off in the recognized markets only from the middle of 2001, although the actual volume pick up only happened after 2004. Today, derivatives in the form of futures and options on the index and stocks account for over 90% of the total volumes in the market. That is how dominant they have become. For trading in futures and options you need to understand the finer points of these products in greater detail.

Futures and options are a recent and interesting method of participating in the equity markets. As much as there have been efforts to educate investors and traders on F&O, it is still a product that is widely misunderstood. Both are called derivative products because they derive their value from an underlying asset. This underlying asset could be a stock, an index or even a commodity or even any physical asset. A future is a symmetric product wherein your profits and losses are synchronized. That means, irrespective of whether you are long on futures or short on futures, your profits can be unlimited either ways and your losses can also be unlimited either ways.

Options are not symmetrical in the sense that the buyer of the option has a right to buy or sell an asset but does not have the obligation. On the other hand, the seller of the option has the obligation but not the right. The buyer of the option pays a premium to the seller of the option for giving them the right without the obligation. On the other hand, the seller only gets the premium income. In case of the buyer of the option, the profits can be unlimited after the cost of the option is covered.