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All You Need to know about Future and Options (FNO)

All You Need to know about Future and Options (FNO)


Category : Knowledge Center

What are Future and Options?

Futures and options are financial contracts that allow individuals or investors to speculate on the future price movements of various assets, such as stocks, commodities, or currencies.

In simple terms, futures contracts are agreements to buy or sell an asset at a predetermined price and date in the future. Options, on the other hand, give the holder the right, but not the obligation, to buy or sell the asset at a specified price within a specific timeframe.

Both futures and options provide opportunities for investors to make profits by taking advantage of price fluctuations in the market. For example, if an investor predicts that the price of a certain stock will rise in the future, they can buy a futures contract or an option to potentially profit from that anticipated increase.

Futures and options can also be used as risk management tools. They allow businesses or individuals to hedge against potential losses due to adverse price movements. For instance, a farmer might use futures contracts to lock in a certain price for their crops in order to protect against price decreases.

Uses of Future and Options

Futures and options help manage risk by providing a way to protect against potential price fluctuations in assets.

They allow individuals and businesses to speculate on the future price movements of various assets, potentially earning profits.

Futures are contracts to buy or sell assets at a predetermined price on a future date, while options provide the right (but not the obligation) to buy or sell assets at a specific price within a set timeframe.

They can be used for hedging, which means protecting oneself against potential losses by taking opposite positions in futures or options.

Overall, futures and options offer opportunities to control risk, speculate on prices, and potentially earn profits without directly owning the underlying assets.

Advantages of Future and Options

Risk Management: Futures and options allow individuals and businesses to hedge against potential price fluctuations, protecting themselves from unexpected losses.

Leverage: These instruments offer the opportunity to control a larger amount of assets with a smaller investment, amplifying potential gains (and losses) compared to owning the underlying assets outright.

Flexibility: Futures and options provide flexibility in terms of the timeframe and price at which one can buy or sell assets, allowing for strategic decision-making based on market conditions.

Diversification: By trading futures and options, investors can diversify their portfolios and spread their risk across different asset classes, sectors, or regions.

Speculation and Profit Potential: Futures and options offer the possibility of earning profits by speculating on the direction of price movements without needing to own the underlying assets, providing opportunities for capital growth.

Difference between Futures and Options

Ownership: In futures trading, you agree to buy or sell an underlying asset at a predetermined price and date in the future. However, with options trading, you have the choice, but not the obligation, to buy or sell the underlying asset.

Risk: Futures trading carries higher risk because you are obligated to fulfill the contract at the agreed-upon price, regardless of the market conditions. On the other hand, options trading allows you to choose whether or not to exercise the option based on the market conditions, which can limit your risk.

Potential Profit: In futures trading, your profit or loss depends on the difference between the contract price and the market price at the time of contract expiration. In options trading, your profit potential is higher because you have the opportunity to benefit from favorable price movements while limiting your losses.

Cost: Futures trading typically requires a smaller upfront investment known as margin, as you are obligated to fulfill the contract. Options trading involves the payment of a premium, which is the cost of purchasing the option, giving you the right to buy or sell the underlying asset.

Flexibility: Options trading provides more flexibility as it offers a variety of strategies to profit from different market conditions, such as buying calls or puts, selling covered calls, or engaging in spreads. Futures trading is more straightforward, focusing on the direction and price movement of the underlying asset.

Future and Option service at Libord Brokerage Private Limited:

Libord Brokerage Private Limited is a financial brokerage platform based in Mumbai, India. We allow people to invest in stocks, mutual funds, IPOs, digital gold and fixed deposits. We have our own trading app called LibordEasy, which is highly rated and secure. 

Open Free* Demat & Trading Account and Start Investing in 15 mins*

Zero Brokerage on Equity Delivery Trades | Rs. 20 Per Trade on All Options | No AMC on first Year

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