The Derivative Instruments of Futures and Options

Futures and options are the derivative instruments to be traded on the stock exchange. These do not contain any independent value with available values derived from underlying assets. Assets can be of many types including commodities, currencies, and securities. Futures contracts signify selling or buying of underlying securities at future dates. Upon buying the contract, one promises payments on specific times. Those who sell must do the buyer transfer at specified future price.

Settlement of contract occurs upon expiry where the date is pre-specified. Settlement occurs through delivery of cash or underlying assets as required. Those who wish can also go for contract rollovers for next month. However, those who don't want to post on contract settlement up to the expiry date may always go for closure midway. Options contract allows buyers to sell or buy based upon predetermined prices. This can be well within or when the specified period ends. Buyers don't have any obligations however, with the seller of light to settlement whenever the buyers exercises such a right.

Two types of options are available, namely PUT, and CALL. Call signifies the right, but it is never the obligation for underlying asset purchase through premium payments. Call option seller can sell underlying assets at strike specified prices. Therefore, will and options contract the exercise right remains with the contract buyer. Obligations related to options remain with the buyers justifying the premium payments to them. In case of futures and options, you require low capitals signifying the margin money. However, this kind of trading is only appropriate for individuals having a high net worth.