What is Future and Option?

Futures and Options make the major part of the stock market. Both Futures and Options are the product of Derivative segment. F&O came into place for the risk averse investors who were willing to enter the market only by minimizing the risk arising out of fluctuations in asset prices.
Future & Option Advisory
BSE is the originator for Derivatives in India, as it created history by launching exchange traded derivative in the year 2000 on 9th june. BSE commenced trading in Index Options on Sensex on June 1, 2001, Stock Options were introduced on 31 stocks on July 9, 2001 and Single Stock Futures were launched on November 9, 2002. MCX launched derivatives in Gold on the auspicious day of Dhanteras on 17th October, 2017.

Derivatives were the answer for risk averse investors. Derivatives became famous as they were able to partially or say fully transfer the risk by locking in prices, for the underlying asset, to be bought or sold in future.

Proof of the same can be witnessed on growing interest of retail investor into the derivative segment, amid edge of leverage it provides. In India, as per the data available, No. of contracts over derivatives in all segments, including stock future, index future and stock and index option, since the launch till date has grown by CAGR of 232.99%, where as turnover has grown up by 188%. Looking at the daily basis, daily average turnover including all the segments escalated by CAGR of 118.41%.

futures is an agreement between two parties buy or sell a underlying asin future date pre determined price

option is a right to sell or purchase a underlying asbut not a obligation.

If you wish to bet on the price of the futures contract so that it goes higher or lower in trading purposes then you need to buy options. When it comes to the types of options, there are mainly two types of options – call option and put option. There is a need of “call option” when you think that the underlying futures price would move higher. Corn call option means when you can expect corn futures to move higher. You should however try get some share tips when you go for investing your money in the market.
When it comes to “put option”, if you believe that the underlying future prices will move lower, then you can always opt for this option. There is another concept called, “soybean futures” where you can expect to move lower. This is also called “soybean put option.” Premium option is a term where you need to pay some kind of price when you buy an option. There is an expiry date for options where it means that it cannot be hold for a longer period of time. They last for only a certain period of time. Let us suppose that you buy an option in December, in that case, the option will expire in late November. So, you have to close the position before it gets expired.

Future & Options :-
The difference between a commodity, a futures contract and an options
contract is illustrated in the following three paragraphs, which will take
you a minute and a half to read.
Suppose you’re in the market for an oriental rug. You find the rug of your
choice at a local shop, you pay the shopkeeper $500, and he transfers the
rug to you. You have just traded a commodity.
Suppose instead you wish to own the rug, but you prefer to purchase it in
one week’s time. You may be on your way to the airport, or maybe you
need the short-term use of your money. You and the shopkeeper agree,
verbally or in writing, to exchange the same rug for $500 one week from
now. You have just traded a futures contract.
Alternatively, you may like the rug on offer, but you may want to shop
around before making a final decision. You ask the shopkeeper if he will
hold the rug in reserve for you for one week. He replies that your proposal
will deny him the opportunity of selling the rug, and as compensation,
he asks that you pay him $10. You and the shopkeeper agree, verbally or
in writing, that for a fee of $10 he will hold the rug for you for one week,
and that at any time during the week you may purchase the same rug for a
cost of $500, excluding the $10 cost of your agreement. You, on the other
hand, are under no obligation to buy the rug. You have just traded an
options contract.

Futures:-A futures is an agreement between 2 parties to buy or sell an assest at a certain time in future at a certain price.

Options :-Option gives a right but not the obligation of buy or sell.
calls-gives the buyer the right but not obligation to buy
Puts -gives the buyer the right but not obligation to sell

Futures : Futures are a contract wherein you have to buy a specified share at a specified price on a specified date. It is compulsory to buy the share on that particular date. In option it is not compulsory.

Example : Say the current price of Infosys is Rs.1550.00. I enter into a February Future to buy Infosys at Rs.1700.00. Now it is compulsory for me to buy Infosys at Rs.1700.00 in February 2008.If the price of Infosys in February is say Rs.1600.00 then I make Rs.100.00 loss but if it is Rs.1800.00 then I make Rs.100.00 profit. In option I pay say Rs.20.00 premium and then it is not compulsory. If price is Rs.1600.00 I will not buy in Feb if I am having Option.

Options : It is the right but not the obligation to buy the shares at a predetermined price. Options are of two types : Call Option and Put Option. In Call option the holder has the right to buy the share at a specified price but it is not his obligation to buy the share. In put option you have the obligation to sell the share at a specified price.

Example : I enter into a Call option for a share at say Rs.1000.00 to buy a share on 20.01.2008. The option expires on 20.02.2008. Now I pay some premium say Rs.20.00 for this. Now if the price of the share rises above Rs.1000.00 then I can exercise my option and make profit. However if the price of the share does not increases but say decrease to Rs.960.00 then I will not exercise my option. It is not compulsory for one person to exercise option. However the premium already paid is the cost one has to bear.