Future and option PDFs

1. FUTURES &
OPTIONS

2. Derivative contracts are financial instruments that derive their value
from an underlying asset, such as stocks, bonds, commodities, or
currencies. They enable investors to speculate on price movements
or hedge against risks without directly owning the underlying asset.
Derivatives come in various forms, including futures, options, swaps,
and forwards.
What Are Derivative Contracts?

3. An options contract is like a special deal that gives you the choice
to buy or sell something at a certain price, but you don't have to if
you don't want to. It's like having a coupon that lets you decide
later if you want to use it. People use options to take advantage of
price changes or to keep themselves from losing money if things
don't go the way they expected.
What Are Options?

4. Call Option: A call option is like a contract that gives you the right, but not the
obligation, to buy a specific asset, like a stock or a commodity, at a
predetermined price (known as the strike price) within a certain period of time.
This can be really handy if you believe the asset's price will go up. If it does, you
can use the option to buy it at the lower strike price, and then sell it in the
market at the higher current price, making a profit.
Put Option: On the flip side, a put option is a contract that grants you the right,
but not the obligation, to sell a particular asset at a set price within a certain
timeframe. This can be useful if you anticipate that the asset's price will
decrease. If you're right and the price drops, you can use the option to sell
the asset at the higher strike price, even though the market price is
lower, thereby locking in a profit.
What Are Call And Put Options?

5. A strike price is the predetermined price at which the holder
of an options contract can buy or sell the underlying asset
when the option is exercised. It serves as the reference point
for determining potential profits or losses and is set when the
option is created. The strike price remains fixed regardless of
fluctuations in the market price of the underlying asset.
What Is A Strike Price?

6. Moneyness of an option refers to its current relationship with the market price of the
underlying asset.
In the Money (ITM): An option is "in the money" when its strike price is favorable
compared to the current market price of the underlying asset. For a call option, this
means the market price is higher than the strike price. For a put option, it's the
opposite – the market price is lower than the strike price.
At the Money (ATM): An option is "at the money" when its strike price is very close to
the current market price of the underlying asset. The difference between the strike
price and the market price is minimal.
Out of the Money (OTM): An option is "out of the money" when its strike price is
not favorable compared to the current market price. For a call option, the
market price is lower than the strike price. For a put option, the market
price is higher than the strike price.
Moneyness Of An Option

7. Nifty is currently trading at 22040
ATM OTM ITM

8. Think of an option premium as a "reservation fee" for purchasing the option.
When you're interested in using an option to potentially buy or sell an asset at a
specific price in the future, you need to pay a premium upfront. This premium is
like the cost of holding onto the option and having the right to make that future
trade.
Option premium is determined by various factors, including the asset's current
price, the strike price, how much time is left before the option expires, and how
volatile the market is.
So, if you decide to use the option later and actually make the trade, you've
already paid your "reservation fee" with the premium. But if you choose not to
use the option, the premium is the cost you've paid for having that possibility
available to you.
What Is An Option Premium?

9. Option selling, or "writing options," is a strategy used in financial markets where you
create a contract allowing someone else the choice (but not the requirement) to buy or sell
an asset at a set price within a certain period.
● Selling a Call Option: You allow someone to buy an asset from you at a specific price
before the option expires. If the asset's price increases and the buyer exercises the
option, you must sell it at that price, even if it's now worth more.
● Selling a Put Option: You agree to buy an asset at a specific price before the option
expires. If the asset's price decreases and the buyer exercises the option, you must
buy it at that price, even if it's now worth less.
As an option seller you make money through the premium received from
the option you sold.
What Is Option Selling?

10. Option sellers make money by selling options contracts and collecting
upfront payments called premiums from buyers. When you sell an
option, you're giving someone else the right to buy (in the case of a
call option) or sell (in the case of a put option) an asset from or to you
at a specific price in the future. The premium you receive is your profit.
If the option isn't exercised by the buyer, you keep the premium
without having to take any further action. However, if the option is
exercised, you might have to fulfill the terms of the contract, which
could lead to potential losses
How Do Option Sellers Make Money?

11. Selling Call Option:
● You sell someone the right to buy an asset from you at a set price.
● You earn money upfront (premium) but might have to sell the asset if its price
goes up.
● Here the risk is unlimited.
Buying Put Option:
● You buy the right to sell an asset at a set price.
● You can make money if the asset's price falls, but you pay a premium upfront.
● Here the risk is limited to the premium paid by the buyer.
Both involve premiums and offer different ways to profit from price movements,
with their own risks and potential outcomes.
Selling Call Option vs Buying Put Option

12. The lot size of futures and options contracts is decided by the exchange where they
are traded. The exchange will consider several factors when determining the lot
size, including:
The underlying asset: The value of the underlying asset is used to determine the
contract size because it is important for the exchange to ensure that there is
enough liquidity in the market to support the trading of the contracts. If the
contract size is too large, it may be difficult to find buyers and sellers for the
contracts.
The volatility of the underlying asset: The more volatile the underlying asset, the
smaller the lot size will typically be. This is because the exchange wants to protect
itself from losses in the event of a large price movement.
The liquidity of the underlying asset: The more liquid the underlying asset,
the smaller the lot size can be. This is because it is easier to buy and sell
contracts in a liquid market.
Lot Size Of Futures And Options

13. Liquidity matters a lot in futures and options trading. Liquidity refers to the ease with
which an asset can be bought or sold without affecting its price. In a liquid market,
there are many buyers and sellers, so it is easy to get in and out of positions without
having to significantly impact the price.
In futures and options trading, liquidity is important for two reasons. First, it allows
traders to get in and out of positions quickly and easily. This is important because
futures and options contracts are often used to hedge against risk or to speculate on
price movements. If it is difficult to get in and out of positions, then traders may not be
able to protect themselves from losses or take advantage of market opportunities.
Second, liquidity helps to ensure that prices are fair. In a liquid market, there are
many buyers and sellers, so the prices of contracts are more likely to reflect the
true value of the underlying asset. This is important for traders who want to
get a fair price for their contracts.
Liquidity

14. ● Price risk: The price of the underlying asset can move against you, resulting in losses.
● Leverage risk: Futures and options contracts are leveraged instruments, which means that
you can control a large amount of an underlying asset with a relatively small amount of
capital. This can magnify your profits, but it can also magnify your losses.
● Liquidity risk: Futures and options markets are not as liquid as stock markets. This means
that it may be difficult to buy or sell contracts at the price you want.
● Volatility risk: The prices of futures and options contracts can be volatile, which means that
they can fluctuate rapidly. This can make it difficult to predict how much money you will make
or lose on a trade.
● Expiration risk: Futures and options contracts have expiration dates. If you do not close out
your position before the contract expires, you may be forced to take delivery of the
underlying asset, even if you do not want it.
● Margin requirements: Futures and options traders are required to maintain margin
accounts. This means that they must deposit a certain amount of money with their
broker to cover potential losses.
● Counterparty risk: Counterparty risk is the risk that the other party to a futures
or options contract will default on their obligations.
Risks Involved In Futures And Options

15. When you buy a call option, you have the right to buy the underlying
asset and if you wish to exercise the contract then you will need to pay
the amount (Quantity × Strike price) to the counterparty for the
settlement of the contract (This is only possible if your option has
turned ITM on or before the day of expiry) and now the seller of the
call option will be obligated to sell the asset at the predetermined price
and if he fails to obligate the contract then he might face some fines
and will have to buy the asset at market price so that the settlement
can be completed.
Settlement Of Futures And Options Contracts