Future & Options – Introduction for Beginners
Remember the first time you decided to try riding a bicycle? Remember the exhilaration the thought brought you? The eagerness to explore this simple yet unexplored feeling, mixed with the constant fear of falling and getting hurt. For investors who have just started their investing journey – and for those casually browsing more investment tools – venturing into the realm of Future & Options may evoke familiar emotions. The first steps are likely to feel like an intoxicating blend of excitement and uncertainty.
But,
As Ralph Waldo Emerson would like us to remember, “Knowledge is the antidote to fear.” As you deepen your understanding, the shadows of uncertainty will retreat and you will gain the required knowledge, along with the power to maximize your benefits from Future & Options trading. Are you excited to learn more?
Let’s get started.
What are Future and Options?
The market dynamics have changed. They are not what it used to be decades ago. Today, with so many opportunities for investors to grow their money, returns – in fact, better returns – depend a lot more on ‘how’ then ‘what’. Simply put, the game is no longer about how much and where you invest; it is more about how you invest. Future & Options is one such way.
These financial instruments provide opportunities to potentially profit from price fluctuations, whether the price goes up or down, by entering into contracts based on their expectations of future market movements. It guarantees better returns but with an equally greater risk. What does it mean? You don’t actually have to own assets. Instead, you can enter into a financial contract, known as a derivative, that allows you to speculate and sell on the future price of a particular asset without actually owning it.
Now, here’s where it gets interesting.
- With Future Trading, you enter into an agreement or contract to sell the assets at a predetermined price at a specified time in future, let’s say three months. After three months, irrespective of what the price of your assets is, you have to sell it.
- With Options Trading, you enter the contract but it doesn’t obligate you to sell the assets at the predetermined price and time. You can choose to do so depending on whether you are making profits or not. That said, irrespective of whether you call or put, you will incur a premium charge that must be paid at the predetermined time.
Let’s understand this with an example.
You are in the market looking for a nice house. Luckily, you find one in a premium locality. You know the price is going to go up and you can make huge profits by selling the house in future. Now, you have two options to go about buying the house:-
You can pay the entire sum to the owner, register the property on your name and sell it at the right time to earn profits from your investment.
Or
You can enter into an agreement or contract with the owner and promise to buy the house at the current market price but in a year, when the market value of the property goes up and profit is guaranteed.
Let’s assume you went ahead with the second approach and the value of the property went down by 15%. Under the explained circumstances, here’s what your options would be in Future & Options trading.
- With Future Trading, you will have to buy the house at the agreed price and bear the loss.
- With Options Trading, you can simply refuse to buy the house and instead, pay the premium. This minimizes the potential loss to a great extent. The premium varies from one asset to another and depends on a lot of factors,
Now before you go on investing in Future & Options with the knowledge you’ve gained, it is advised you read more. Better understanding of the investment tools will help you make informed decisions, ensuring better profits. Remember, any form of investing or trading should not be based on guesswork. It may reap short-term gains but not for long. Moreover, choose the investment tools wisely. Make sure the tools are aligned with your characteristic future goals.
