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Future and Option segment details for trading in Indian stock market
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All about future and option trading
If you tried to master a new language it can be extremely difficult in the initial days. But as days pass you get used to it and will be able to speak with considerable ease. The same can be said of options too. It is basically an extension of stock trading. For most amateur investors mastering trading of futures and options will be like learning a new language. They get perplexed seeing the complex jargons of terms used and the complicated processes that precede and ensues every major transaction.
However, once you get accustomed to trading practices in stock exchanges you will understand that the same concepts of delta, strike price and time value apply to futures and options too. After all these instruments deal with money ultimately and hence use only an extension of existing financial principles. In this article we seek to explain all about future and option trading which will be of immense benefit to those who venture into the business sooner or later.
The first thing about options on futures that make an investor out of place is the future contract. A future contract is an underlying contract based on which future trade transactions are carried out. (For instance, HP trade options will carry options on HP stock and not of Dell computers and so on.) Ideally investors with minimum experience in stock trading will be able to predict stock prices of underlying instruments with considerable accuracy. However, new investors who are yet to deal with any kind of security will have to familiarize themselves with option specifications of various commodities like bonds, soya bean, gold, coffee, etc. other S&P stocks can also be included in the list. Given the online sources we have today this is pretty easily achievable by any amateur.
Future options can be settled into cash upon the contract expiration. If the option is not exercised within the expiry of the contract the rate agreed upon will be taken as the base and transacted. Investors may or may not gain the resulting difference of the actual stock price of the option. Hence, it is very vital to keep in mind to quote a price that is not significantly larger or smaller than the underlying instrument in order to minimize losses. Similar to stock trading futures and options are also very uncertain leaving much of the credits to prudent speculation.
For someone who is confused whether to stick to securities trading or venture in future and options, we will also stand by the choice of future and options. There is so much possibility of earning a higher rate of return unlike securities which also carry greater risk of losing net worth.
About the author
The author is a future and options trader and is also a contributor of academic articles on the subject to various broking agencies in India. His recent article on all about future and option trading created a phenomenal response from the securities industry where reliable advice doesn’t come so easily.
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