Derivatives Trading Basics
by 5paisa Research Team Last Updated: 2022-06-15T12:42:49+05:30

Introduction

Futures trading and options trading are two of the most profitable tools in the trader's arsenal. However, they are very different ways to trade, and you should be aware of the differences before you start. 

Futures trading is not just reserved for institutions and large hedge funds anymore. You can trade in futures and options yourself using the right tools. This blog will look at five of the most basic differences between these two trading instruments. Besides that, we will also cover points to help you understand how you can trade them yourself. 

What Is Futures?

Futures are different from regular trading in that there is a time delay of delivery of the goods. This is to allow for a better speculation of price on said goods. Futures are different from forward contracts in that there is a third party involved in futures trading. This third party is the futures exchange. Lastly, futures contracts are standardized. This means that the terms of the goods to be delivered are already determined before the contract is signed.

What Is Options?

Options is a financial tool designed to give investors more flexibility and control over their portfolio. If you are considering getting involved in options trading, the first step is to know what they are. Options give you the right and not the obligation to take an action at a predetermined price and time. If you would like to buy 100 shares of company XYZ at $20, you can purchase a call option for 10 dollars. Options have the potential to return to you a high rate of return over time.

What Are the Key Differences Between Futures and Options in Trading?

Unlike futures, options provide you with the opportunity to buy or sell a coin before the agreed upon date of the contract. This can be a very valuable tool for investors. There is always going to be risk involved with an investment, but with options, you have the chance to limit the type of risk you will face. Acting as insurance against a decrease in value.

Options are a great way to hedge your bets. This can be particularly helpful if you have a lot of coins you have acquired that are already seeing a loss in value. If you use options to hedge your position, you can lock in a profit and limit the amount you lose.

How to Trade In Futures?

The futures market allows for buyers and sellers to buy and sell futures contracts on an underlying asset at a predetermined price on a certain date in the future. There are many kinds of futures contracts available in the futures market. They are divided into two types:  Physical delivery and cash-settled. 

Futures are contracts between the buyer and the seller and not the asset. This is what allows the buyer to profit from the rise and the fall of price over the life of the contract. This is one of the major advantages futures have over buying or selling stocks.

How to Trade In Options?

When you buy an option contract, it gives you the right to buy or sell the underlying security at a predetermined price, called the strike price, on or before the expiration date. Options are usually purchased to speculate on price movement of the underlying security. The price of options contracts generally moves in the same direction as the underlying security price on which they are based, up or down.

Conclusion

The idea of trading in futures and options may seem a bit daunting at first. However, it can actually be a good way to invest. We hope you found this article interesting and useful in understanding futures and options better. If you have any questions, do mention them in the comments section.

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