Exploring the Differences between futures and option trading

Podcast Duration: 05:25

Hi doston, Angel One ke is podcast me aapka swagat hai.

Doston stock market mein kai log stocks buy aur sell karte hain. Jab aap kisi stock ko buy ya sell karte ho, toh ye shares basically aapke demat account me credit ho jaate hain - ya fir sell hone par aapke demat account me paise credit ho jaate hain. Lekin this is not all that goes on in the stock market. There is an entire world in the stock market that works on identifying and placing the movements of prices of a stock or commodities - not right now, but on a future date. And all this action takes place in the futures and options markets. Sounds cool, right?

I was discussing some differences between futures and options trading with my friend Akshay, lekin Himanshu ko ye baaten theek se samajh hi nahi aa rahi thi. Kyunki he was confused between futures and options ke concepts.

Aap kahin himanshu ki tarah confused to nahi ho? Chalo ek baar ye review kar hi lete hain.

Basically, futures aur options dono contracts hote hain. Lekin ek future contract ke zariye aap koi stock ya commodity - jaise XYZ Corporation ya fir gold or crude oil buy ya sell kar sakte ho, at a fixed price in the future. Toh agar maine predict kiya ki XYZ stock ki price 30 dino mein neeche jaane wali hai, toh main is forecast se profit karne ke liye ek futures contract buy karoonga, jiske through I will be able to buy the stock at a lower price in 30 days from the market, and sell it for a higher price using my futures contract. Note kariye ki futures contract se aap bahar nahi nikal sakte - if your underlying security loses all its value, toh aapko 100% loss bhi ho sakta hai. Isliye, one needs to be careful when dealing with futures contracts.

Lekin options alag tarah se function karte hain. Basically options are just that - an option to buy or sell at a later date. Options contract ke saath bhi ek strike price indicated hoti hai. Agar aapne call option liya hai, toh aap basically ek fixed price par future mein ko stock buy kar sakte ho. And put options allow you to sell a commodity at a fixed price in the future. Sounds simple haina? Ab aap ye toh jaante hi hoge ki options aur futures contracts, dono purchase karne ke liye hi aapko premiums pay karna padta hain. Toh agar aapke contract ke underlying security aapke expected direction mein move karti hai, lekin aapki premium value se kam move karti hai, then you might still end up making no money, or a small loss.

Isliye, options aur futures trading - both must be based on solid technical analysis and facts rather than a hunch or speculations. In fact, mere dost Akshay ne futures aur options trading me enter karne ke liye hi mujhse advice maangi thi - and this is exactly what i told him.

Toh ab dekhte hain kuch significant differences between futures and options.

Number 1 - Futures aur options mein the key difference is the obligation to act. Futures contracts ke case mein ek certain date par aapko us contract ke terms execute karne hi honge, whether the trade is profitable to you, or whether it comes at a big loss. On the other hand, options me aapko trade execute karne ka koi obligation nahi hota hai.

Number 2 - Futures aur options bring a very different kind of risk to your portfolio or positions. As mentioned earlier, futures mein downside risk essentially aapki trade amount ka 100 percentage bhi ho sakta hai. Jiska matlab ye, ki futures trading mein stop loss ke bina trade karne se you can lose any amount of money. Options ke case me the most you can lose is the premium that you pay to buy those options.

Doston yeh point aapko clear hua kya? Because risk ka concept F&O trading mein bahut important hai. Toh chaliye dekhte hain next difference.

Number 3 - Futures contracts ki value expiry dates approach hote hue decay nahi hoti hai - yani ki ek futures contract jiski expiry date aaj se do weeks door hai will not lose its value as it nears the expiry date. Lekin options ki value expiry date ke paas pahunchte hue reduce hoti jaati hai. Ye isliye, kyunki present time aur expiry date ke beech underlying security ki value move hone ke liye bacha hua time frame short hota jaata hai.

Number 4 - Futures contracts basically margin trades ko resemble karte hain. Kyunki agar underlying security ki price aapke expected direction ke opposite move karna padti hai, toh aapko end of day par woh margin apne broker ko pay karna hota hai. Lekin agar aapka analysis sahi tha, and the security’s price moves in the direction that you expected it to, toh wo paise aapke account me credit ho jaate hain. But options ko use karke aap ek cheap price le liye speculation kar sakte ho. Jiska matlab ye, ki risk aur rewards options contracts mein symmetric nahi hote.

So friends, ye the kuch key differences between futures and options trading. You must also know ki options contracts ko kuch log hedge ke form mein bhi use karte hain.

Are you interested in learning more about how futures and options markets work? Then check out our other podcasts on the topic, or visit www.angelone.in to learn more.

Fir milenge next podcast mein. Tab tak ke liye, goodbye from angel broking, and happy investing!

Investments and the securities markets are subject to market risks. Read all the related documents carefully before investing.