InvestorQ : What exactly is meant by futures and options and how can traders benefit from futures and options?
Rutuja Nigam made post

What exactly is meant by futures and options and how can traders benefit from futures and options?

Answer
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Riya Dwivedi answered.
1 year ago


A future is a right and an obligation to buy or sell an underlying stock (or other asset) at a predetermined price and deliverable at a predetermined time. Options are a right without an obligation to buy or sell an equity or index. A call option is a right to buy while a put option is a right to sell. Now let us look at how traders can benefit from futures and options trading?

Let us look at futures first. Assume that you want to buy 1500 shares of Tata Motors at a price of Rs.400. That will entail an investment of Rs.6 lakhs. Alternatively, you can also buy 1 lot (consisting of 1500 shares) of Tata Motors. The advantage is that when you buy futures, you only pay the margin which (let us say) is around 20% of the full value. That means your profits will be five-fold that of when you are invested in equities. But, the losses could also be five-fold and that is the risk of leveraged trades.

An option is a right without an obligation. So, you can buy a Tata Motors 400 call option at a price of Rs.10. Since the lot size is 1500 shares, your maximum loss will be Rs.15,000 only. On the downside, even if Tata Motors goes to Rs.300, your loss will only be Rs.15,000. On the upside, above Rs.410 your profits will be unlimited.