ReCap from previous posts.
In the First Episode :
A Futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price.An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.
The primary Difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.
Underlying: A stock (Say RPL) or Index (Say Nifty)
Certain Date: Settlement Date of the Month for which Position is taken. Generally we trade in Current Month and Settlement Date is last Thursday of the Month.
Interpretation ...
Say Today I buy RPL future For Rs 230 when current market Price for RPL in cash market is 225.
This means on Settlement date:(31 jan for this month) if RPL is @ Rs 230(future price) its no Profit no Loss for me, and if its 250(settlement price) I gain Rs 20 but I loose Rs 20 if its 210.
So same way, seller of the future contract gains the amount I loose or looses the Amount I gain.
Benefit: Unlimited Profits Posssible, Leverage I get....
Drawback: Unlimted Loss Possible
Now Lets Talk about Options:
An Option is a contract, which gives the buyer the right, but not the obligation to buy or sell shares of the underlying security at a specific price on or before a specific date.
Options can be call option or put option where you get the right to buy or sell specified quantity of the underlying security.
Buyer has to pay a premium to get the rights to buy or sell. Seller of options is also called writer who is obliged to perform according to option terms.
There are many factors which affects the price of an option.
1. Underlying value of the security.
2. Time remaining till the expiry. Options generally decay near the expiry because price of the underlying becomes more predictable and less probabilistic and volatile.
3. All the other information which affects the underlying security like interest rates, divident payouts, liquidity, historical prices, support zones etc.
Underlying : Lets say Nifty Index
You bought a Nifty call option for the strike price of 2800. On expiration the Nifty is at 2850. You will recieve 50*50 which is the lot size for Nifty = Rs 2500. If you have already paid a premium of Rs 20 then you profit remains 30*50 which is Rs 1500. Also you have to factor in the brokerage both for buy and sell. There is mini nifty available with lot size of 20. If the Nifty at expiry is below 2800 you dont get any thing and you loose premium + brokerage.
Other articles on derivatives.
Derivatives Basics
Y Derivatives?
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