options trading

When you want to invest in something, there is a chance you will get overwhelmed by the options as plenty of them are available in the market. So, it’s natural to get confused. And choosing the best of them becomes more important at that point.

If you are looking at the stock market, then what could be the best options other than future and options trading? But do you have any idea regarding this? What is F&O in the stock market? If that’s what you are wondering, then you have come to the right place.

What are futures and options?

Future and options are mainly the two important derivatives of other assets which are traded in the market. In other words, they tend to derive value from other underlying assets. These two can be used as derivatives for multiple assets like equity stocks, currencies, and even commodities. But if the value of the underlying asset changes, so does the value of these derivatives- that is, the future and options also change accordingly.

What is F&O trading?                                       

Now, this is the part where you need to pay attention. Simply put, Future and options trading is mainly the purchasing and selling of futures and options. That means the futures and options can also be traded between the buyers and the sellers, just like their underlying assets.

In the stock market, Futures are primarily derivative contracts that obligate a buyer or a seller to trade the stock of a company at the predetermined price that too on a predetermined date in the future. Whereas options in the stock market stand tall as the derivative contract, which bestows the buyer with a contract of the right to buy or sell a company’s stock at a predetermined price on a predetermined date in the future. Here the buyer has the voice of buying or selling the asset, whereas the seller has none.

Now, if both the terms are clear to you, let’s know about some key terms related to future and options trading.

1. Lot Size

The lot size is an important term if you are discussing futures trading basics. It denotes the minimal number of shares or derivatives in a contract. The lot size is the standardized quantity specified by the exchange and cannot be changed by the user. The lot size, however, is not constant and differs from one security to another.

2. Contract value

The contract value is basically the present value of the futures contract multiplied by the lot size of the contract. As in the future contract, the current Price keeps on changing, and the contract value also does not stay static.

Therefore, from the future contract buyer’s perspective, the contract value is the total amount one has to part with when taking delivery on the contract expiry date.

3. Contract Expiry

Contract expiry is another fundamental concept you need to know as a part of the future trading basics. It is just like the options because every future contract expires on the last of the Thursdays of each month. And the last Thursday being the holiday, the contract would expire on the previous trading day.

One thing you must know, at any point in time, future contracts will always have three different expiries.

4. Open Contract

An open contract is when you buy or sell a futures contract and if it has not been marked out or if it has not expired yet. For example, if you have bought a TVS MOTOR JUL FT contract on the exchange, the contract will continue to be termed as an open contract until it expires or decides to mark it off by selling the contract.

5. Open Interest

Open interest is mainly the whole number of open contracts of a particular financial asset in the market. This asset can be anything- an index, a stock, a commodity, or even a currency, among others.

6. Margin

If you want to trade in Futures, you are not required to pay the entire contract value upfront, and rather you only need to deposit a certain percentage of the contract value with the exchange. So, this amount that you would deposit is called the Margin. You can consider margin as a sort of security deposit that is collected by the stock exchange in order to make sure as a trader, and you can fulfil all the obligations that are related to the future contract

7. SPAN Margin

SPAN is also known as Standardized Portfolio Analysis Risk. It is mainly employed by stock exchanges, and SPAN Margin is a sophisticated system that is powered by algorithms and is used to assess the margin requirements of a particular contract. This SPAN margin is known as the only margin required to trade the futures contract.

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