Futures and Options differ from each other with respect to the “obligation” to buy or sell something at a certain price on a specific date in the future. Read more…
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How Futures and Options work
Imagine you have a cricket bat that you really like and you want to make sure you can buy it at a good price in the future. You can either buy the bat now for the current price, or you can make an agreement with the shopkeeper to buy the bat for a certain price at a future date. This is similar to how Futures and Options work in the Indian market.
Also read: How options are traded
Difference between a Futures & Options contract?
A futures contract is an agreement between two people to buy or sell something (like a cricket bat) at a certain price on a specific date in the future. For example, you might agree to buy a certain number of shares of a company at a certain price on a specific date in the future. This can be helpful if you think the price of the shares will go up in the future, because you will be able to buy them for the lower price agreed upon in the futures contract.
On the other hand, an option contract gives you the option (but not the obligation) to buy or sell something at a certain price on a specific date in the future. It’s like having the option to buy the cricket bat, but not being required to do so.
For example, you might buy an option to buy shares of a company at a certain price on a specific date in the future. If the price of the shares goes up, you can exercise your option and buy the shares for the lower price agreed upon in the option contract. If the price doesn’t go up, you don’t have to buy the shares and you only lose the money you paid for the option contract.
Conclusion
Futures and options are like agreements to buy or sell something at a certain price in the future. Futures contracts are like promises to buy or sell something, while option contracts give you the choice to buy or sell something at a certain price.
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