What is Futures and Options?

Futures and options both fall under the ‘Derivatives” category

  • Futures

    Futures are contracts wherein two parties enter into an agreement to trade (buy or sell) a certain asset at a pre-determined price and at a specific future time.

  • Options

    Options on the other hand, are agreements wherein the buyer gets a right (and not an obligation) to fulfill his/her part of the trade.

Options trading in India has two variants: Call Option and Put Option

  • Call Options

    A call option gives you the choice to exercise your buying rights (at the strike price) before the expiration of the options contract.

  • Put Options

    With a put option you get the right to sell a stock (or an index) before the option expires, at the strike price.

Difference between Futures & Options

The primary point of difference between futures trading and options trading is that while the former is a liability or an obligation, the latter gives a choice to the buyer. The contract remains binding for the seller in case of futures as well as options trading. Here is a quick comparison of futures and options:

Futures Trading Options Trading
Buyer’s & Seller’s perspective Buyer and seller both have an obligation to honor the contract. Buyer has a right (not an obligation) to honor the contract. Seller has an obligation to honor the contract, if the buyer exercises his/her right.
Margin amount Little higher than ATM options and OTM options For buying options there is no margin required (only Premium is paid) In the case of sale of options, margin depends whether the option is ITM, ATM or OTM. In the case of OTM options, the margin is less then futures
Advance payment No advance payment needs to be made to the seller. But MTM (Mark to Market) is payable/receivable on a daily basis. Buyer needs to pay a fee (premium amount) upfront to the seller. In the case of buying there is no daily pay-in or pay out. But in the case of sale of options, daily margin keeps on varying to the extent of daily MTM.
Profit and loss potential Unlimited Buying of Options:Profit potential is unlimited and Loss potential is limited to the extent of premium paid.
Sale of options: Profit in the form of premium receipt is limited but the loss potential can be unlimited like futures
Importance of time Time holds little significance as the contract can be squared off till expiry date.The difference between cash price and future price depends on several things including prevailing interest rate. Time plays a crucial role in options contract , as the premium contains the insurance part also, besides interest.

Who should trade in Future & Options?

Future and option traders can be categorized into the following groups:

  • Hedgers

    Futures and options trading can be used as a risk management tool as they can provide hedging against investment volatility. Hedgers seek to lock-in their future gains or possible loss by getting into such derivative contracts.

    For instance, buying futures and buying put for protection, selling futures and buying call for similar protection, buying or selling option at one strike price and simultaneously buying or selling option at another strike price, buying or selling option at one strike price in near month and simultaneously buying or selling option at same or another strike price in far month.

    It is important to note that in the case of hedging, the margin is reduced drastically, sometimes even to the extent of 70%.

  • Speculators

    Speculators try to predict the future price movement basis intrinsic value, economic situations, etc. and take the position to profit from the price fluctuations.

  • Arbitrageurs

    Price differences exist in the market due to inefficiencies and imperfections. Arbitrageurs seek to profit from these price differences between two segments, two exchanges. Sometimes long short strategy is also applied in which one scrip is sold and another scrip is bought.

Things to keep in mind before you trade in Futures and Options

While investing in commodities, you need to remember that there is no “best” strategy that will work for everyone. A good and balanced commodity trading strategy is one which takes into account the below factors:

  • Trading Market

    Futures are available only on some select stocks based on predefined criteria F&O. Trading is available on both NSE and BSE.

  • Premium

    For your options trading strategy of buying options, you need to factor in the deposit premium amount. Option premium is the reward or fees paid by the buyer to the seller for getting the right to choose without any obligation. If you choose to sell the options, the premium should be approximately same as Futures.

  • Margins

    An important factor to consider before deciding your futures trading strategies, is Margins. Since upfront margin is required, your account needs to have adequate margin funding before you can place a trade. Margins are like a good-faith deposit meant to cover losses due to adverse price movements. The initial margin is calculated by taking into account SPAN and exposure.

  • Leverage

    F&O trading runs on the concept of leverage i.e. the entire cost of trade is not required to be paid upfront.

How to invest in Futures and Options with TradeSmart?

Step 1

Fill up the account form Online or Offline.

Step 2

We Verify your application and the documents.

Step 3

Your account is Open and we send the trading account details using which you can Start trading

Our customers love trading via TradeSmart. Every single day.

Benefits of trading Futures and Options with TradeSmart

TradeSmart provides a simple yet effective, one-stop solution for all your trading needs in Futures and Options, stocks, currency as well as commodities. Here are some reasons why you should choose TradeSmart for your F&O trading needs:

Futures and Options Trading

Two Decades of Solidarity

With more than two decades of rich experience, TradeSmart helps you make the best trading decisions.

Futures and Options Trading

Flexible and hassle-free trading

TradeSmart employs cutting-edge automation and technology in its processes and services. It boosts efficiency, brings down transaction costs and creates a superior customer experience.

Futures and Options Trading

Cost-efficiencies

TradeSmart offers one of the lowest brokerage rates in the industry. Moreover, the plans are flexible to accommodate the varying trading needs and volumes of various traders.

Futures and Options Trading

Best Exposure

You do not need to worry about limited funds stopping you from making big investment decisions with TradeSmart. TradeSmart has one of the highest intraday exposures.

Futures and Options Trading

Service and support on the go

You can trade on the go (from multiple platforms – web, desktop or smartphone). Moreover, the team at TradeSmart actively supports you throughout.

Common questions

Futures trading as well as options trading have their own merits and limitations. The final choice would depend upon factors such as your risk appetite, time horizon, investment objectives, etc.

Here are some futures and option trading tips which will make your trading experience smoother and more fruitful-

  • Understand the basics of futures and options trading
  • Understand the risks involved.
  • Choose a dependable and well-established broking partner.
  • Start with well-known and robust stocks or indexes as they have higher volumes.
  • Develop a quantifiable F&O trading strategy.

Expiration date refers to the last day till which the option contract is valid. In India, it is the last working Thursday of the month for stocks and every Thursday for Index Options with weekly expiry.

Open Demat Account &

Trade @ Rs15 per order.

Open Demat Account With TradeSmart

Lowest Brokerage Ever Trade @15 Per Order
Download the app now

Scan below QR Code
to download App

Open Demat Account