Futures and Options (F&O) - Meaning, Types, Difference (2024)

FAQs

Futures and Options (F&O) - Meaning, Types, Difference? ›

A future is a contract to buy or sell an underlying stock or other assets at a pre-determined price on a specific date. On the other hand, options contract gives an opportunity to the investor the right but not the obligation to buy or sell the assets at a specific price on a specific date, known as the expiry date.

The choice between futures and options depends on your investment goals and risk tolerance – Both instruments can be used for hedging, but options offer more flexibility and limited risk. Futures offer higher potential profits but also higher risk, while options provide limited profit potential with capped losses.

There are different types of futures, both in the financial and commodity markets. Stock, index, currency, and interest futures are examples of financial futures. Futures are also available for agricultural products, gold, oil, cotton, oilseed, and other commodities.

For example, if you buy a futures contract for 100 barrels of oil at ₹50 per barrel, you are obligated to buy the oil for ₹50 per barrel even if the market price of oil has risen to ₹60 per barrel by the expiration date. The opposite is true if you sell a futures contract.

In India, intraday trading takes place from 9:15 AM to 3:30 PM, and orders cannot be placed before the market opens. Trading in futures and options (F&O) involves using derivatives, which are financial instruments that derive their value from an underlying asset such as shares or commodities.

Futures have several advantages over options in the sense that they are often easier to understand and value, have greater margin use, and are often more liquid. Still, futures are themselves more complex than the underlying assets that they track.

Options Trading Example

You'd be entitled to purchase 100 shares at ₹110 per share regardless of the actual price of the share is on December 1. On that day, if the shares of Company X are trading at a price higher than ₹110, you have the right to purchase them at a lower price, and hence, make profits.

What's the difference between forex and futures trading? The difference is that forex trading involves buying and selling currency, while futures trading is a way to trade thousands of financial markets, such as forex, indices, shares, commodities and more.

Market Order – A market order is a basic order type that instructs the broker to buy or sell at the best available price. Market orders are considered to be the most immediate way to enter or exit a trade and are often executed instantaneously.

Commodities attract fundamentally-oriented players including industry hedgers who use technical analysis to predict price direction. The top five futures include crude oil, corn, natural gas, soybeans, and gold.

What are F&O futures and F&O options? ›

Futures and options (F&O) are derivative products in the stock market. Since they derive their values from an underlying asset, like shares or commodities, they are called derivatives. Two parties enter a derivative contract where they agree to buy or sell the underlying asset at an agreed price on a fixed date.

Futures and options, as financial derivatives, differ in their mechanisms and risk profiles. Options grant investors the right, but not the obligation, to buy or sell assets at a predetermined price, while futures entail an obligation to buy or sell assets at a future date.

A Future is a right and an obligation to buy or sell an underlying asset at a predetermined price. Options are a right without an obligation to buy or sell equity or index. While a Call Option is a right to buy while a Put Option is a right to sell.

With the growing number of investors in the F&O space, some level education and regulation is needed, or else it risks becoming a gambling pit for those looking to make easy money, said Kedia. “Ninety percent of the people doing this think this is an online game.

Whether intraday or futures trading is better for a trader depends on their trading style, experience, and financial capacity. Intraday trading works well for traders who want to make money quickly and are used to the fast pace of the market.

Options trading involves contracts and predicting future prices, while intraday trading involves buying and selling stocks simultaneously. Both methods offer potential profits, but options trading requires a deeper understanding of contracts and higher risks.

The difference between option and future contract is that a future contract is an obligation to buy/sell the commodity, when the options give us the right to buy/sell. Clearing corporation is an independent corporation whose stockholders are member clearing firms. Each maintains a margin account with the clearinghouse.

The key difference between the two is that futures require the contract holder to buy the underlying asset on a specific date in the future, while options -- as the name implies -- give the contract holder the option of whether to execute the contract.

A forward contract is an agreement between two parties to exchange a certain amount of currency at a specified rate and date in the future. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain amount of currency at a predetermined rate and date in the future.

Futures Vs Options

The main difference between futures and options is that futures require both parties to execute the trade at a set date and price, while options give the right, but not the obligation, to trade, offering more flexibility and limited risk exposure.