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Future and option trading

Future markets

Future trading:

In simple words futures trading, is a contract, which is essentially an agreement between two parties

to buy or sell an underlying quantity of shares at a certain time in the future at a certain price.

A futures contract usually has a standardized date and month of delivery, quantity and price. Futures trading is usually carried out on a exchange.

Futures differ from forwards in terms of margin and delivery requirements.

In order to facilitate liquidity in futures trading, the futures exchange specifies certain standard features of the contract.

Here In India stock futures on the NSE. In futures markets ,trader can take buy/sell position in index or stocks contracts having a longer period of up to three months.

If, during the period of the contract time, the stock price moves in your favour

( rises in case of buy position or falls in case of sell position), Trader can make a profits.

At Present in NSE only few selected stocks,

which meet the criteria on liquidity and volume, have been enabled for futures trade.

Normally most of stock have circuit filters from 2 % to 20% depend upon the group & stock,

But The selected stock for Future markets have not circuit filters.

Example:

Satyam :price range was from 200 to 30 Rs .in a single day.

Essar Oil: price from 70 Rs. To 130 Rs in a single day.

But remember if trader who hold any Future position of any stock,

this kind of swing may bring fantastic unbelievable profit or a huge huge loss. So Future trading is one of the most risky trade.

Some expert traders trade futures with covered call or puts option to restrict their risk.

Option Trading

Call option and Put option

A Call option represents

the right (but not the requirement) to buy a set number of shares of stock at a pre-determined 'strike price' before the option reaches its expiration date.

A call option is purchased in hopes that the underlying stock price will rise well above the strike price, at which point you may choose to exercise the option.

Exercising a call option is the financial equivalent of simultaneously purchasing the shares at the strike price and immediately selling them at the now higher market price.

A Put option represents

the right (but not the requirement) to sell a set number of shares of stock (which you do not yet own) at a pre-determined 'strike price' before the option reaches its expiration date.

A put option is purchased in hopes that the underlying stock price will drop well below the strike price, at which point you may choose to exercise the option.

Now if one is to buy a call option or put option than maximum risk is the total investment.

The premium/price paid multiply by the quantity. But at the same time if a trader sell call/put option than risk is very difficult to predict.

So it may involve lots of risk. But Options and hedging is comparatively good idea to play with lesser risk but it needs More exercise, study & analysis.

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