Futures And Options Trading: Difference And Types Of Traders
Futures & Options are a significant kind of stock derivatives that are traded in the share market. Basically, stocks in this category are agreements between two parties to purchase or sell them at a specific price on an upcoming date. By deciding the selling or purchasing price in advance, traders minimise the associated market risks.
In order to secure investments at a predetermined price, investors are able to manage future risks when trading stocks under FnO. However, price movements, being unpredictable and investors making an accurate market forecast, might result in major losses or gains. Hence, investors having a solid knowledge and understanding of stock market operations actively trade in such stocks.
Futures And Options: What’s The Difference?
Trading IPO stocks under futures and options is different in regard to the obligations imposed on investors. Futures are a liability for the investors, needing them to follow up on a particular contract by a pre-decided date; however, a contract for options provides individuals the right to do the same.
The contract of futures to purchase or sell an underlying security needs to be followed on a specific date at the contractual price. However, the contract for options trading comes with an option to do the same if investors make a profit from a trade.
Who Invests In Futures And Options?
Traders willing to invest in future and option trading are divided into the following types:
- Hedgers
These individuals prefer F&O trading in the share market to minimise investment volatility regarding the price fluctuations. Deciding on a specific price for a transaction on an upcoming date allows investors to explore profits in case the price fluctuates adversely with respect to the trading position assumed by the buyer. However, when favourable fluctuations arrive, investors trading in futures contracts encounter major losses. This risk is minimised in an option contract, as the individual gets to create a deal when favourable price swings occur.
Hedgers focus on creating expenditures or profits in the future by deciding on a derivative contract. These traders are well-known in the commodity market, where investors try to secure and assume the price of a particular asset for a profitable exchange.
- Speculators
Speculators are those investors who predict the price movement directions in the share market, according to economic conditions and intrinsic valuation and decide to take an opposite stance to profit from price fluctuations in the present.
Most of these speculators enter into derivative trading for cash settlement, under which physical transfer of a particular asset is not performed. On the other hand, the difference between the present market price, which is also known as the spot price, and the price decided for the derivative is decided between the two parties, minimising the hassles of these trades.
- Arbitrageurs
Investors under this category capitalise on price differences of the same asset in different exchanges or markets. They purchase an asset in one market at a lesser price and sell it in another market when the prices are higher, making considerable profits from the difference. This strategy needs an understanding of market inefficiencies and quick decision-making. Arbitrage traders in futures and options enhance market efficiency and liquidity by bridging price gaps across multiple trading platforms.
Conclusion:
Investors trading in futures and options must be aware of the basics to minimise upcoming risk with their investment via predetermined prices. However, as price movement directions are unpredictable, trading in futures and options might result in substantial losses or profits when the market prediction proves inaccurate. Therefore, hedgers, speculators, and arbitrators trade in futures and options to gain profits via different strategies.