InvestorQ : How does buying and selling of options differ from buying and selling of futures?
prachi Patwardhan made post

How does buying and selling of options differ from buying and selling of futures?

Answer
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2 years ago


Principally, you can buy and sell options and futures from your broker trading terminal. There is no great rocket science to it. However, while futures are straightforward products, options are slightly more nuanced and have a lot more of complexities. Buying and selling options are slightly more complicated that buying and selling futures. That is because futures are linear products while options are non-linear products. Whether you are long or short on a future, your profit profile is quite clear. If you are long and the price goes up then there is a profit and if the price goes down there is a loss. Options became non-linear for the buyer and the seller. For the buyer, the profits are unlimited but the losses are limited to the extent of the premium paid. For the seller, the losses can be unlimited but the profits are limited to the extent of the premium received. It is this non-linearity of returns of options that makes more complex and vulnerable to a host of other factors.

One of the techniques of evaluating options is the concept of Option Greeks. There are a variety of Greeks like Theta, Delta, Gamma, Rho and Vega. Each of these Greeks measures the sensibility of the option price to changes in external factor. One of the most important Greeks with respect to options is Delta, which measures the sensitivity of the option premium to changes in price of the underlying asset. If we are referring to the Nifty December 2018 option then the Delta will measure the sensitivity of the option premium to shifts in the spot price of the Nifty.