FUTURES AND OPTIONS <ul><ul><ul><ul><ul><li>SUCHITRA BAI </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>PATENTS DEPARTMENT </li></ul></ul></ul></ul></ul>
FUTURES <ul><li>A Futures Contract is an agreement between the buyer and the seller for the purchase and sale of a particular asset at a specific future date. The price at which the asset would change hands in the future is agreed upon at the time of entering into the contract. </li></ul><ul><li>The actual purchase or sale of the underlying involving payment of cash and delivery of the instrument does not take place until the contracted date of delivery. A future contract involves an obligation on both the parties to fulfill the terms of the contract. </li></ul>
OPTIONS <ul><li>An option is a contract that goes a step further and provides the buyer of the option the right without the obligation, to buy or sell put as specified asset at an agreed price on or upto a specific date. </li></ul><ul><li>For accuring this right the buyer has to pay a premium to the seller. The seller on the other hand has the obligation to buy or sell that specific asset at the agreed price. The premium is determined taking into account a number of factors, such as (a) the underlying's current market price, (b) the number of days to the expiration the strike price of the option, (c) the volatility of the underlying assets, and (d) the risk less rate of return. </li></ul><ul><li> </li></ul>
TYPES OF OPTIONS <ul><li>Options are of two types – </li></ul><ul><li>Calls and Puts. </li></ul><ul><li>Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a future given date. </li></ul><ul><li>Puts gives the buyer the right, but not obligation to sell a given quantity of the underlying asset at a given price on or before a given date. </li></ul>
PUT OPTIONS VS. FUTURES CONTRACT <ul><li>Limited Risk </li></ul><ul><li>Less Volatility </li></ul><ul><li>Your losses on buying a put option are limited to the premium you paid for the option plus commissions and any fees. With a futures contract, you have virtually unlimited loss potential. </li></ul>
CONTD… <ul><li>Put options also do not move as quickly as futures contracts unless they are deep in the money. This allows a commodity trader to ride out many of the ups and downs in the markets that might force a trader to close a futures contract in order to limit risk. </li></ul><ul><li>One of the major drawbacks to buying options is the fact that options lose time value everyday. Options are a wasting asset – theoretically, they are worth less each day that passes. You not only have to be correct on the direction of the market, but also on the timing of the move. </li></ul>
BUYING AN OPTION <ul><li>Suppose you expect the price of gold futures to move higher over the next 3-6 months. It is currently January, so you would probably buy an August gold call to give yourself enough time. Gold is currently trading at Rs. 2000/-per gram. You expect the price to climb to Rs. 3000/- within 6 months. </li></ul><ul><li> </li></ul>
DIFFERENCE BETWEEN FUTURES AND OPTIONS FUTURES OPTIONS Futures Contract is an agreement to buy or sell specified quantity of the underlying assets at a price agreed upon by the buyer and seller, on or before a specified time. Both the buyer and seller are obliged to buy/sell the underlying asset. In options the buyer enjoys the right and not the obligation, to buy or sell the underlying asset. Unlimited upside and downside for both buyer and seller Limited downside (to the extent of premium paid) for buyer and unlimited upside. For seller (writer) of the option, profits are limited whereas losses can be unlimited. Futures contracts prices are affected mainly by the prices of the underlying asset. Prices of options are however, affected by (a) prices of the underlying asset, b) time remaining for expiry of the contact and c) volatility of the underlying asset.
DIFFERENCE BETWEEN CALL OPTION AND PUT OPTION CALL OPTION PUT OPTION Option Buyer Buys the right to buy the underlying asset at the strike price Buys the right to sell the underlying asset at the strike price Option Seller Has the obligation to sell the underlying asset to the option holder at the strike price Has the obligation to buy the underlying asset from the options holder at the strike price.