Futures and options (F&Os) are financial derivatives used by traders or investors to gain returns or hedge existing investments. F&O provides the right, and not the obligation, to buy or sell an asset at a predetermined price and date. However, they are known to operate differently and have distinct risks.
Futures are financial contracts that allow traders to buy or sell an underlying asset, which could be commodities, currencies, or stock market indices, at a predetermined price on a specified future date.
There are three primary categories of futures contracts: equity futures, index futures, and commodity futures, with other specialised types such as currency futures, interest rate futures, and Volatility Index (VIX) futures.
On the other hand, options are financial instruments that provide traders with the right, and not the obligation, to buy (call option) or sell (put option) an underlying asset (a stock or an index) at a predetermined price (strike price) on or prior to a specified future date (expiration date). These contracts are traded on stock exchanges like the BSE and the National Stock Exchange (NSE).
For an individual to choose between futures and options purely depends on their financial goals and risk appetite. Futures contracts are binding and carry high leverage, making them ideal for confident market predictions.
However, they pose the risk of unlimited losses, making them unsuitable for risk-averse investors. Generally, futures trading is not recommended for beginners, as it involves higher risk due to leverage and can result in significant losses if not managed carefully.
Contrary to this, options offer flexibility and limited risk, as losses are often restricted to the premium paid. However, the choice between futures and options depends solely on an investor’s trading objectives.
In the end, futures prove to be attractive for those seeking high-risk, high-reward opportunities, while options may be a suitable option for those valuing flexibility and risk mitigation. It is important to note that F&O investment calls for careful market understanding and risk management.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.