Financial markets consist of both “equity markets” and “Futures and options segment”.

Futures and options are a bit riskier than equity markets. If you are starting to trade in Futures and options, then it is essential for you to learn about Futures and options terms.

Without understanding these futures and options terms, it is difficult to cope up with this segment. “Futures and options” has many terms involved with itself. I will be explaining some of the important terms below:

1. Futures – A futures contract is an agreement that is signed between two traders to buy or sell the underlying at a pre-determined price in the future.

2. Options – An option is the right, not the obligation to buy or sell an underling at a specific strike price. Options are rather difficult to understand, because they are complex.

3. Expiry date – Every contract has to be ended before a specific date. This date is called the “Expiry date”. So, in clear terms an “Expiry date” is the one by or on which open contracts must be squared off.

4. Lot size – Lot size refers to a determined size of stocks, and multiples of which, one can buy or sell. So, every stock or an index or a commodity, has a specific lot size decided. These are fixed amount of shares that we could transact in multiples.

5. Margin money – This is a term used only or Futures. This is the main cause, of Futures containing high risks and rewards. Margin money is the money that needs to be deposited, when buying or selling a Futures contract. A good fact here is, you need not pay for the actual amount of shares or lots which you bought or sold. You just need to pay some percentage of that money. The percentage varies from anywhere between 20 and 30.

6. Strike price – This term is only for the options. A strike price is a specific price of a stock or an index for which an option is written. The “strike prices” of a particular stock has certain fixed price intervals between them. There are many strike prices available for a particular stock.

7. Call option – There are two types of options. One is ‘Call option’ and the other is ‘Put option’. A call option is the one that is bought by a trader, expecting that the underlying’s value would rise in the future and vice-versa. Here, vice-versa means that a ‘call option’ could be written or in other words, sold. So, if trader hopes that the value would decline or remain side wards, then he/she could sell the call option and make money.

8. Put option – Similarly, a put option is the one that is bought hoping that the underlying’s value will decline. A trader can also write [sell] a put option similar to the above point.

9. Premium – Premium is a Futures and options term which is used only in options. A premium is the one that you would be paying for buying a call or a put option. Every strike price has an option with some premium associated.

Tags: Buying and selling, Commodities, Finance, fundamental analysis, futures, Futures and options, Futures and Options terms, Options, Stock markets, Technical Analysis, trends, underlying instrument

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