A derivative is a contract that derives its value from the underlying assets like securities, currency, index and commodities. Derivatives are used for hedging, trading, speculating across all asset classes.
Type of derivatives –
- 2. Options
- 3. Swaps, etc.
In general, the derivatives segment is used by traders who trade in Futures and Options, so today will discuss F&O.
- Futures –
- Future is an exchange-traded contract in which two parties are agreed to buy or sell securities at a specific price on a specific date. It’s is a standardized contact means the lot size and contact date are pre-decided. It’s an obligation for buyer and seller to deliver or receive security.
- Options use for hedging future contact is also standardized contact in which the lot size of the securities and date of the contract is fixed.
The key differences between the future and options are that future contract buyer and seller have an obligation to exercise their contract. In contrast, Option buyers do not have any obligation to exercise the contract. On the other hand, for the option seller, it is an obligation to exercise the contract.
Two types of options are available –
Call option and Put option
Call options – whenever a trader is bullish on a certain underlying, it can buy a call option at a specific strike price and pay a premium. If the underlying is moving upward, then the price of the options is increasing. If the expiry underlying price is above the strike price, then the options have some value.
Put Options – whenever a trader is bearish on a certain underlying, it can buy a put option at a specific strike price and pay a premium. If the underlying is moving downward, then the price of the options is increasing. If the expiry underlying price is above the strike price on the date of the expiry price, then the options have some value.
Or else it will be zero, and the option seller enjoys the premium that you have paid to buy the right in both the option situation.
I hope this might help you all to differentiate between the F&O contract.
Let me know in the comment section.