Future and option are the common forms of derivatives. The derivative instruments changes according to the changes in the values of the underlying.
Most of the traders want to make Big money from the market only. But as always everything has pros & cons, Investments in Future & option have pros & cons.
As to make investments in future you need more capital (not suitable to small traders & investors), the same place while you are investing in options there are more chances of risk if you do not understand, how to play in Future & options trading?
Difference Between Future & Options:
The major fundamental difference between future & options trading is lying obligations, they put on their buyers and sellers.
Options trading is giving the right to the buyers but not the obligations to buy (or sell) any asset at any specific time. On the other hand in Future, it is giving right and obligation to the buyers and sellers to buy or sell any certain assets at any specific time.
Aside from commision, investors can invest in future contracts without no upfront cost, wherein options contracts they have to pay the premium to make any investments.
Another difference between options and future is the size of underlying positions. Generally, the underlying position is much larger for the future contracts, which makes futures riskier for the inexperienced investor.
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How will you make money from the options strategies as investor or trader from your existing investment…
An investor owns shares of hypothetical company Called Reliance industry. They like its long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat, perhaps within a couple dollars of its current price of Rs. 961.50.
If they sell a call option on Reliance industry with a strike price of Rs. 980, they earn the premium from the option sale but cap their upside on the stock to rs. 980. Assume the premium they receive for writing a current month call option is Rs. 20.65 (rs.20650 per contract or 1000 shares).
One of Three scenarios will play out:
a) Reliance industry shares trade below the rs. 980 strike price. The option will expire worthlessly and the investor keeps the premium from the option. In this case, by using the buy-write strategy they have successfully outperformed the stock. They still own the stock but have an extra Rs. 20650 in their pocket, fewer fees.
b) Reliance industry shares fall and the option expires worthless. The investor keeps the premium which helps offset the decline in the stock price.
c) Reliance industry shares rise above rs. 980. The option is exercised, and the upside in the stock is capped at Rs. 980. If the price goes above rs. 1000.65 (strike price plus premium), the investor would have been better off holding the stock. Although, if they planned to sell at Rs. 980 anyway, writing the call option gave them an extra Rs. 20.65 per share.
This is one of the ways to generate money from your existing portfolio without increasing your risk.
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