Options and futures are types of derivatives, meaning their value is derived from an underlying asset such as stocks, indices, commodities, or currencies. These instruments allow investors to speculate, hedge risk, or leverage positions in the market. They are widely used in India on platforms like the NSE and BSE.
Futures Trading
A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date.
Futures are obligatory, meaning both buyer and seller must complete the transaction on expiry if the position is not closed earlier.
Key Features of Futures
- High leverage: Small margin required to take a large position.
- Obligation to honour the contract: No choice once entered.
- Used for hedging and speculation: Helps manage risk or take directional bets.
- Daily mark-to-market: Profits/losses are settled every day.
Example:
If you buy a Nifty Futures contract and Nifty rises, you gain; if it falls, you lose.
Options Trading
Options give the right, but not the obligation, to buy or sell the underlying asset at a fixed price before or on expiry.
Options come in two types:
- Call Option: Right to buy
- Put Option: Right to sell
Key Features of Options
- Limited risk for buyers (you lose only the premium paid)
- Unlimited risk for sellers (option writers carry higher risk)
- No obligation to exercise the option if it’s not profitable
- Used for hedging, income generation, and speculation
Example:
If you buy a Call Option on Reliance at ₹2,500 strike price and the price rises to ₹2,650, your option gains value.
Futures vs Options (At a Glance)
| Feature | Futures | Options |
| Obligation | Yes | No (right, not obligation) |
| Risk | High (unlimited) | Limited for buyers |
| Cost | Margin required | Premium required |
| Usage | Hedging & speculation | Hedging, speculation, income strategies |
| Complexity | Moderate | High |
Important Note for Investors
Options and futures are high-risk, leveraged instruments. They are suitable only for experienced investors who understand:
- Margin requirements
- Time decay
- Volatility
- Risk management
- Position sizing
For long-term wealth building, most investors are better served with mutual funds using asset allocation–based strategies.
