Options and futures are two forms of exchange (also known as derivatives) in the indian share market. It is a forward trading method wherein you enter in to the transaction today, and the settlement will take place in a later date. The settlement date that is finalized is called the expiry date of contract.
In case of future trading there is a future contract wherein an agreement is made between the buyer and seller for the purchase and sale of a particular asset like a currency, bond, stock or index are a specified date and for a specified price. While entering into the contract itself the price at which the particular asset should change hands is decided. The actual sale or purchase takes place only after the date of delivery. In case of a future contract both the parties should carry out all the terms and conditions of the contract.
In case of option trading it is a contract which provides the buyer the option to buy or sell the specified asset (stock or index) at an agreed price and up to a specified date. The buyer has to pay a premium to the seller to get this right, and the seller has the obligation to sell or buy the specified asset at the agreed price. The premium is decided after taking various factors like the current market price, number of days, volatility of the market etc into consideration.
The exchange specifies the strike price, expiration date and other important factors for an option trading. An option trading is of two kinds, the call option and the put option. The option that provides the buyer the right to buy is called the call option and the right to sell is called the put option. The buyer of the option exercises his right to sell the asset to the seller of the option at the predetermined price.
There are 1 month, 2 month and 3 month future contracts available.. The risk involved in trading in futures is equal to the buyer and the seller. Futures contract prices are similar to cash market prices and have the same structure but the main difference is that there is no price band for futures and options. The exchange normally fixes the price range. Options are traded just like how stocks market are traded. Options can be bought and sold, but the buyer pays only the premium amount and not the value of the contract. The commission in case of options will depend upon the strike price of the underlying assets
