Trade in Futures & Options

Things you need to know about F&O

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  What are Derivatives?

  The financial instruments are known as derivatives. Essentially, they serve as instruments for risk management. They help anyone who is exposed to underlying risk in managing their risk.

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  What is a Forward contract?

  A tailored agreement between two parties to buy or sell an asset at a predetermined price at a future date is known as a forward contract. Although its non-standardised nature makes it particularly suitable for hedging, a forward contract can be utilised for speculating or hedging.

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  What is an Options contract?

  An option is a contract that gives the right—but not the obligation—to buy or sell the underlying at a specified time and price (also called as the strike price). The seller of an option is the one who receives the option premium and is therefore required to sell/buy the asset if the buyer exercises it on him, whereas the buyer of an option pays the premium and buys the right to exercise his option.

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  Types of options: calls and puts

  ‘Calls’ give buyer the option, but not the obligation, to purchase a certain amount of the underlying asset at a specified price on or before a specified future date.
  
  ‘Puts’ give the buyer the option, but not the obligation, to sell a certain amount of the underlying asset at a specified price on or before a specified future date. Cash is used to settle each and every option contract.What is the meaning of Strike price?
  The strike price of an option refers to the cost at which the option's buyer can buy stock (in the case of a call option) or sell stock (in the case of a put option) on or before the option contract's expiration date. When the option is exercised, this is the price at which the stock will be bought or sold. Only in the case of options, the strike price is used; it is not used for futures or forwards.

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  What is the concept of in the money, at the money and Out of the money in respect of Options?

  In-the-money option
  When an option will result in a cash inflow for the buyer upon exercise, it is considered to be in-the-money. Therefore, call options are in-the-money when the underlying spot price is higher than the strike price. Put options, on the other hand, are profitable when the underlying spot price is less than the strike price.
  
  Out-of-the-money option
  The opposite of an in-the-money option is an out-of-the-money option. When an option is out-of-the-money, the holder won't exercise it. A call option is out-of-the-money when the strike price exceeds the underlying spot price, and a put option is out-of-the-money when the underlying spot price exceeds the option's strike price.
  
  At-the-money option
  When the underlying spot price matches the strike price, the option is said to be at-the-money. The option will either become in-the-money or out-of-the-money with any change in the underlying spot price at this point.