What are Futures & Options (F&O)

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Futures are standardized financial contracts that require the buyer to purchase and the seller to sell a specific asset at a predetermined price on a set date. They're used for speculation and hedging in various markets, allowing investors to profit from price changes in assets like commodities, stocks, and interest rates.

Introduction

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What are futures? Futures are contracts where a buyer or seller agrees to trade a specific quantity of an asset at a set price on a future date. These contracts apply to various assets, such as stocks, commodities, and currencies. They help manage price risk, like when a country buys oil futures to hedge against rising oil prices or farmers secure crop prices to avoid potential losses due to price drops when selling their harvest.

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What are Options? Options are derivative contracts that grant the right, but not the obligation, to buy (call option) or sell (put option) an asset at a predetermined price on a specified future date. Call options let you buy at a set price, and put options allow you to sell at a fixed price, but you can choose not to if it's not advantageous. These contracts offer flexibility for strategies like speculation, hedging, and risk management.

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What is future and option trading?Futures and options trading allows you to freely trade on different exchanges, such as stocks on stock exchanges and commodities on commodity exchanges. Importantly, you can participate in these trades without owning the actual underlying assets. For example, you can invest in gold futures and options to benefit from price movements in gold without needing a large capital investment.

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F&O trading in the stock market Futures and Options (F&O) trading in stocks is growing popular. You trade indices and securities without owning them, just paying an initial margin to your broker. Bigger trades mean bigger potential profits but also greater risk if prices move against you.Options are less risky; you can choose not to execute them if prices don't match your expectations, with your loss limited to the premium paid for the contract. Understanding F&O in the stock market helps you make money while managing risk.

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Futures and options in commodities Commodity futures and options are available for investors but involve significant risk due to market volatility. They offer leverage for potential profit but also higher risks. These instruments are traded on exchanges like MCX and NCDEX in India and play essential roles in hedging and maintaining market liquidity, presenting opportunities for knowledgeable investors.

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