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future and options [ F & O ]

CA Abhash Mishra (Chartered Accountants) (598 Points)

28 November 2008

sould anybody clearfy that what is the meaning of future options(f&o), this word is generaly used in stock market.

thanks

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10 Replies

(Guest)

I think this is a theorical question in FM-PCC .So you may refer it.

CA. Dashrath Maheshwari (TaXpert) (15090 Points)
Replied 28 November 2008

option

Definition:

The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time. For stock options, the amount is usually 100 shares. Each option has a buyer, called the holder, and a seller, known as the writer. If the option contract is exercised, the writer is responsible for fulfilling the terms of the contract by delivering the shares to the appropriate party. In the case of a security that cannot be delivered such as an index, the contract is settled in cash. For the holder, the potential loss is limited to the price paid to acquire the option. When an option is not exercised, it expires. No shares change hands and the money spent to purchase the option is lost. For the buyer, the upside is unlimited. Options, like stocks, are therefore said to have an asymmetrical payoff pattern. For the writer, the potential loss is unlimited unless the contract is covered, meaning that the writer already owns the security underlying the option. Options are most frequently as either leverage or protection. As leverage, options allow the holder to control equity in a limited capacity for a fraction of what the shares would cost. The difference can be invested elsewhere until the option is exercised. As protection, options can guard against price fluctuations in the near term because they provide the right acquire the underlying stock at a fixed price for a limited time. risk is limited to the option premium (except when writing options for a security that is not already owned). However, the costs of trading options (including both commissions and the bid/ask spread) is higher on a percentage basis than trading the underlying stock. In addition, options are very complex and require a great deal of observation and maintenance. also called option contract.

CA. Dashrath Maheshwari (TaXpert) (15090 Points)
Replied 28 November 2008

futures contract

Definition:

A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses. Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of goods, or arranging for an exchange of goods, futures contracts can be closed. Hedgers often trade futures for the purpose of keeping price risk in check. also called futures.

This content can be found on the following page:

https://www.investorwords.com/2136/futures_contract.html

(Guest)

Originally posted by :Dashrath Maheshwari
"	futures contractHi, Mumbai bomb blast can be considered as one of the most horrible attack. Due to blast even Exchanges like Regards <a target='_blank' rel='nofollow' href="https://www.sharetipsinfo.com" title="BSE">BSE</a> and NSE are kept closed for one day. Now post attack we are getting news of resignations of various political leaders and officers. So is that another political move or there inner self is waking up?? What you have to say about it??, Looks like some political move is there!! Now stock market will be affected by all political moves, though sentiments are not good but on technical charts market is quite bullish for very short term, still sentiments will effect Nifty movement. So all are advised to trade in small quantity and with strict stoploss till the picture is clear. Regards <a target='_blank' rel='nofollow' href="https://www.sharetipsinfo.com" title="www.ShareTipsInfo.com Team">www.ShareTipsInfo.com Team </a> Call at:- +91-9891655316 +91-9899056796 +91-9891890425 On Yahoo Messenger: ShareTipsInfo @ yahoo.com or ShareTipsInfo_1 @ yahoo.com On Google Talk: ShareTipsInfo1 Mail at:- contact @ sharetipsinfo.com sharetipsinfo @ yahoo.com sharetipsinfo_1 @ yahoo.com sharetipsinfo @ gmail.com Definition: A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses. Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of goods, or arranging for an exchange of goods, futures contracts can be closed. Hedgers often trade futures for the purpose of keeping price risk in check. also called futures. This content can be found on the following page: https://www.investorwords.com/2136/futures_contract.html	"

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Replied 02 November 2009

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A standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well. Dollars lost and gained by each party on a futures contract are equal and opposite. In other words, futures trading is a zero-sum game. Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. The exchange of assets occurs on the date specified in the contract. Futures are distinguished from generic forward contracts in that they contain standardized terms, trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by clearinghouses. Also, in order to insure that payment will occur, futures have a margin requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of goods, or arranging for an exchange of goods, futures contracts can be closed. Hedgers often trade futures for the purpose of keeping price risk in check. also called futures.

shwetha (CWA learner) (447 Points)
Replied 20 August 2011

Futures:-

Future contracts are agreements to buy/sell the underlying asset on a specified date at a specified sate.

Characteristics:-

1. Traded in exchages

2. Instead of working with bankers, companies it works with brokers

3. specific amount and specific date

4. useful for speculators, small companies

5. one party gains and one party losses at maturity date

6. there is no exchange of money when the contract is entered

7. Contract binding both the parties.

Options:-

It is a right but not the obligation to trade foreign currency at a specific rate.

Charateristics:-

1.Option buyer has a right to exercise / not to exercise the option. But the option writer can not do so. he is bound to perform his obligation if the buyer exercises his right.

2.Otion writer sells the option at a charge called as "Premium". It is not refundable.

Options Vs. Futures

Options Futures

It is a right to buy/sell the underlying asset It is an obligation to buy/sell the underlying asset.

Tailor made, standardised and customised Standardised and customised

Premium is there Margin is there

Available in exchanges as well as OTC's (Over The Counter) Available in exchnages only.

Krishnamurthy (Founder) (54 Points)
Replied 06 September 2011

Readers of this discusison have by now enough material to know about definitions of Futures and Options.

Simply put, they are leveraged trading products. Since they are leveraged( that is to buy a 100 shares of Infosys, you need to invest only a small percentage of the total value), they are also risky. But if you understand the science of price action, and know how to set your price targets, its highly profitable.

We provide Managed Trading Advisory services for Nifty Futures. To learn more, visit www.GannHurstTrader.com. There are few articles and more will come in the weeks and months ahead.

Caacz (Speculator) (34 Points)
Replied 21 September 2011

I don't know posting an outside link is permitted or not..., if it is not allowed the link can be deleated.

For detailed information on F&O/Stock market one may visit here :

https://www.inditraders.com/members/cac.html

brian anthony (B.Com) (26 Points)
Replied 07 November 2012

Though Futures and Options have been suitably defined and clarified in posts above, trading with them is an all together different process. Trading in equities requires good amount of research and should be done with the assistance of good partner.