Futures and options segment is a part of the financial markets. They are just like normal equity markets. There are many differences between “Futures and Options” segment and “equity markets”.

The main one is Futures and options market has high risk associated with it. So, this market must be carefully played in order to make some profits. With that high risk also emerges, high rewards. So, the futures and options, has both high risk as well as reward and that is the reason, more volumes are traded in that part of the financial markets.

There is a definite need to understand futures and options terminology, because knowing about futures and options will help us be alive in the financial markets.

The basic things that need to be known in Futures and options terminology are listed below:

1. Lot size – Lot size refers to the number of shares or stocks that has been pre-defined for a specific stock or an index. You may buy or sell futures and options of this specific stock in terms of lots or multiples of lots. For example, ABC stock has a lot size of 1000. If you buy or sell, 1 lot, that means that you have bought or sold 1000 shares. So, for 2 lots, 2000 shares and so on. This is an important futures and options term.

2. Margin money – This is only included in Futures. Margin money is the amount of money that needs to be paid, when you buy a lot of a specific stock or an index. One of the most important things in Futures is that you need not pay whole amount of money for the amount of shares, you bought or sold. You just should pay some percentage of the whole money that needs to be paid. For example, Crude oil futures in NYMEX, has a lot size of 1000 and the money which has to be deposited is 25 – 30 % of the actual money.

3. Expiry date – Every futures or options contract has an expiry date on which the contract expires. Every contract that has been bought or sold should be squared off, on or before that specific date, otherwise, the contract expires. Expiry date is included, both in Futures and Options.

4. Call option and Put option – There are two types of options present in the options market. One is call option and the other one is put option. A call option is to be bought, when a trader believes that the price of the stock would rise in the future. Similarly, a put option is to be bought, when a trader believes that the market would fall.

5. Strike price – Strike price is only for Options. A strike price is a price of a specific stock or an index for which a particular option prevails. It is very difficult for a beginner to understand about strike prices and, for that matter, options too. Strike prices are justified with a specific price interval between them. For example, ABC stock is trading at 100 dollars. Some active strike prices for that stock would be 100 C, 105 C, 110 C and 100 P, 95 P, 90 P, where ‘C’ and ‘P’ represent call option and put option respectively. Note that the difference between consecutive strikes is ‘5’.

These are some of the important futures and options terminology. You must note that Futures and Options contain more risk than any of the financial instruments present and therefore, you should trade them carefully.

Tags: Buying, Dow Jones, futures, Futures and options terminology, Index., NASDAQ, Options, selling, Stock markets, Terminology

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