What is an options contract?
An options contract provides the seller a right, not an obligation, to sell or buy shares of given underlying stock at a fixed strike price on or before the date of expiry of the options contract. There are only two kinds of options: call option and put option.
A call option allows the buyer of the contract a right, not an obligation, to buy a contract at a specific time and price. And a put option allows a right to the seller of a contract to sell it within a specific period of time and at a fixed price.
In either case of trade, options are only a secondary form of investment or shares. They are propositions to buy or sell underlying shares but options don’t represent genuine ownership of the underlying investments up until the finalization of the agreement.
For the beginners, it is vital that they look out for stock option tips before they start investing.
What is a futures contract?
A futures contract is easier to understand in relation to commodities like crude oil or agricultural commodities. Futures contracts are a reliable and safeguarding investment. For example, if a farmer wants to land a deal in an acceptable rate in case the market prices of the crops fall before the delivery of the crops to ensure he doesn’t get indebted or the crops don’t go waste. While in the same case, the purchaser also wants to land a deal on an acceptable price as soon as possible in case the prices of the crops go up by the time of delivery. However, in the case of retail buyers, they engage in the sale and purchase of futures contract only on the possibility of the price fluctuation of the underlying security. Their only motive is to gain profit from the price fluctuations of the futures contract, up or down. Although they do not do this for the purpose of taking genuine ownership of any of the commodities.
In case of a stock option being bought by an investor, the cost of premium at the time of the purchase of the contract is the only financial liability. Otherwise, if a seller were to open a put option, he would be exposed to the greatest liability of the stock’s underlying value.
However, in a futures contract, both the buyer and the seller are subjected to maximum liability. So when fluctuation occurs in the underlying stock prices, both or either party of the contract might have to deposit more money to their trading accounts to deliver on their daily obligation.
Owing to the complexities and risks involved it is always advised to avail professional services from a reputed organization like Shyam Advisory and get fruitful stock options tips.
How to decide whether to buy futures or options?
• If there is a possibility of a price of a stock to increase, invest in a call option.
• If there is a possibility of the price of a stock to decrease, buy a put option.
• Sell a call option if there is no possibility of an increase in price.
• Sell a put option if there is no possibility of a decrease.
What is the difference between F&O?
A futures contract is a binding agreement for both the parties for the purchasing and selling of an underlying security at a fixed price and a fixed date in the future. And an options contract allows the buyer a right, not an obligation, to buy or sell an underlying share on or before the date of the expiry of the contract.
While a futures contract is inclusive of both the parties, it has to be followed through on the pre-determined date and the buyer has to purchase it as he is locked into the contract.
Whereas, an options contract offers only an option, not an obligation to buy or sell an underlying security.
Which is a safer bet?
Both Futures and Options contracts are riskier than simple trading of shares and securities but with higher risks come higher rewards. Anyhow, as secure as it may seem to trade in futures contracts, it becomes a wasting asset with time as it gets affected by the smallest of changes underlying the stock options. But an options contract is not so volatile and the maximum risk you take with it is only worth as much as the price you are trading the contract in.
You can avail services for numerous calls and stock options tips from Shyam Advisory. For the safer bet and safe investments, contact us!