“Futures and options” segment is a part in the financial markets. These are two instruments used by traders to make some serious money.

You need to know the fundamentals of Futures and options solutions, before participating in those instruments. Some terms and the functions need to be known to trade in an efficient way in the ‘Futures and options’ market.

A futures contract is an agreement between two sides to buy or sell an underlying instrument at a pre-determined price in the future.

Futures are risky as well as more rewarding than normal equity markets because of a feature called as ‘Margin money’. Margin money is the amount that needs to be deposited for buying or selling a specific Futures contract. The best part is you need not pay for the whole amount of shares bought or sold. You just need to deposit a certain percentage of that money which most likely lies between 20 and 30. So, this makes a Futures contract high in risk and reward.

There is a specific size or number of shares associated with each stock or index. This certain number is known as ‘Lot size’. A trader could buy or sell contracts in multiples of lots. Every stock or an index has a certain number of shares associated and this number could change according to the price.

There is an ‘Expiry date’ associated with every Futures and options contract. So, every contract that has been bought or sold must be squared off on or within that day. So, make sure to square off all your open contracts before or on, the expiry date.

An option is the right, not the obligation to buy or sell a contract at a specific strike price. An option is divided in to two types. One is ‘Call option’ and the other is ‘Put option’. In simple terms, a call option is the one, that a ‘bull’ would be buying and a ‘bear’ would be going towards buying a put option. This sentence means that a trader who expects the market to rise in the future would be buying a call option and similarly, a put option will be bought by a ‘bear’.

For every stock or an index, there are different strike prices for which calls and puts are written. Strike prices have certain fixed intervals between them. For every strike price near to the prevailing stock’s price, calls and puts are written.

You must pay certain amount of money when you buy a call or a put of a specific strike price in a particular stock. The price attached to a call or a put of a specific strike price is known as ‘Premium’.

Here is an example to know about fundamentals of Futures and options markets solutions:

ABC is a stock trading at 102 per share.

The lot size of a future contract or an option contract of this stock is ‘1000’.

The margin money for a Futures contract of this stock is ‘20000’.

The strike prices associated with this stock are 90, 95, 100, 105, 110, etc.

The premium of “100 call option” is ‘4’ and “105 call option” is ‘2’.

The premium of “100 put option” is ‘3’ and “95 put option” is ‘1’.

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