What is the meaning of Futures and Options in Share Trading?

Answer 1

In their simplest form, stock options are a contract between two parties that expires at an agreed-upon time in the future. The contract purchaser is buying the right, but not the obligation, to buy (a "call" option) or sell (a "put" option) an asset (the "underlying") at a specific price, on or before the agreed-upon date. The contract seller is accepting the obligation to take the other side of the transaction.

The earliest known options trade dates from 7th century BCE. Thales of Miletus speculated that the year's olive harvest would be especially bountiful, and put a deposit on every olive press in his region of Greece. The harvest was huge, demand for olive presses skyrocketed, and Thales sold his rights, or options, to the presses at substantial profit. The modern history of stock options trading begins with the 1973 establishment of the Chicago Board Options Exchange (CBOE) and the development of the Black-Scholes option pricing model.

Stock options are defined by several key characteristics. The expiration date specifies when the option contract becomes null and void. The underlying is the asset upon which the stock option is based. The strike price, or exercise price, is the price at which the underlying asset will be bought or sold should the option holder decide to exercise their right to buy or sell. European-style stock options are only exercisable on the expiration date; American-style stock options are exercisable at any time before the expiration date.

An ATM, or at-the-money option, is one where the strike price is roughly the same as the current underlying price. An OTM, or out-of-the-money option, is one where the underlying price is far enough away from the strike price that there is no incentive for the holder to exercise the contract. Conversely, an ITM, or in-the-money option, is one where the holder can exercise the option profitably.

The simplest stock options trading strategy is to buy an OTM call (or put) option if the expectation is for a dramatic increase (or decrease) in the price of the underlying. Spreads involve buying one option and selling another; they are often used to lower the initial cost of the position at the expense of lower maximum potential profit. Examples of spreads are verticals, backspreads, bull and bear spreads, ratio spreads, butterflies, and condors.

Stock options allow speculators to make bets on market movement without having to pick an up or down direction. For example, buying both an ATM put and an ATM call would give the holder exposure to a dramatic move in either direction. Because of this, stock options traders are often said to be trading volatility rather than price.

Futures are a financial derivative known as a forward contract. A futures contract obligates the seller to provide a commodity or other asset to the buyer at an agreed-upon date. Futures are widely traded for commodities such as sugar, coffee, oil and wheat, as well as for financial instruments such as stock market indexes, government bonds and foreign currencies.

The earliest known futures contract is recorded by Aristotle in the story of Thales, an ancient Greek philosopher. Believing that the upcoming olive harvest would be especially bountiful, Thales entered into agreements with the owners of all the olive oil presses in the region. In exchange for a small deposit months ahead of the harvest, Thales obtained the right to lease the presses at market prices during the harvest. As it turned out, Thales was correct about the harvest, demand for oil presses boomed, and he made a great deal of money.

By the 12th century, futures contracts had become a staple of European trade fairs. At the time, traveling with large quantities of goods was time-consuming and dangerous. Fair vendors instead traveled with display samples and sold futures for larger quantities to be delivered at a later date. By the 17th century, futures contracts were common enough that widespread speculation in them drove the Dutch Tulip Mania, in which prices for tulip bulbs became exorbitant. Most money changing hands during the mania was, in fact, for futures on tulips, not for tulips themselves. In Japan, the first recorded rice futures date from 17th century Osaka. These futures offered the rice seller some protection from bad weather or acts of war. In the United States, the Chicago Board of Trade opened the first futures market in 1868, with contracts for wheat, pork bellies and copper.

By the early 1970s, trading in futures and other derivatives had exploded in volume. The pricing models developed by Fischer Black and Myron Scholes allowed investors and speculators to rapidly price futures and options on futures. To supply the demand for new types of futures, major exchanges expanded or opened across the globe, principally in Chicago, New York and London.

Exchanges play a vital role in futures trading. Each futures contract is characterized by a number of factors, including the nature of the underlying asset, when it must be delivered, the currency of the transaction, at what point the contract stops trading, and the tick size, or minimum legal change in price. By standardizing these factors across a wide range of futures contracts, the exchanges create a large, predictable marketplace.

Futures trading is not without significant risk. Because futures contracts generally entail high levels of leverage, they have been at the heart of many market blowups. Nick Leeson and Barings Bank, Enron and Metallgesellshaft are just a few of the infamous names associated with futures-driven financial disasters. The most famous of all may well be Long Term Capital Management (LTCM); despite having both Fischer Black and Myron Scholes on their payroll, both Nobel Laureates, LTCM managed to lose so much money so rapidly that the Federal Reserve Bank of the United States was forced to intervene and arrange a bailout to prevent a meltdown of the entire financial system.

In the United States, futures transactions are regulated by the Commodity Futures Trading Commission.

Answer 2

When u purchase a stock in the cash market u pay for it, and the stock is yours, But in the Futures and options trading u make an agreement to buy/sell a stock by the fixed date (which is normally spread upto 3 Months as per expiry series u have chosen) on a rate fixed today. and Person normally bok profits in trading the agreement in the market prior to the settlement date or the trade settles on the settlement price on the date of expiry.In case of Future index/Stock trading u are bound to pay/accept the difference according to price on the settlement day/day u have traded to square up your position, while in the option contract u are paying the premium money on a particular strike price and u have a right to honour/dishonor the trade, the only risk involved is the premium price u have paid. This is the same way we r also doing in the commodity trading.

Answer 3

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The first challenge is finding a trustworthy binary broker; secondly, you need to find a binary trading strategy, which you can use to make profits consistently. Without an effective trading strategy, there is no way you can make money in this business.
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Answer 4

They are 2 different things.
1. an option is the right to buy 100 shares of a company at a predetermined price and time.Options are priced in dollars(but you have to multiply the price by 100).So,an option priced let's say the price is quoted as $1 = $100 and also there is a time factor element ,also a stike price.The option is either "In the money(i.e.the price of the stock is above the "strike price").It's either above or below the price setting.
So lets say an option on AT&T expiring on the third Fri. of Jan.at a "strike price" of $35 is listed at a closing price of $0.65(that is $65.00 + commission).Is a little "Out of the Money" becaue the closing price of the stock was $34.98.So, for $65+commission you get the profits or losses of the movements of $3,498.00.Once the stock price makes you option "In the money" i.e. "above the stike price ". It moves dollar for dollar with the stock price.So,if you bought a Jan. option for "T" with a strike price of $35 and in Jan. 10 it went to $37.50.You should hypothetically have a option price of like of $2.50 X 100= $250.00- commissions buying & selling the option.So for your $65+commission you can either sell the option for a profit of over 100%.Or take poseesion of 100 shares of T @ $35.These are all estimates the option price is constantly being bought and sold so it kinda moves "in tandem with the stock price which is moving up and down.
Also ,there are new rules for options.Talk to your broker.I've heard that if the option is more than 5 cents "in the money" you have to cough up the $3,500 + commission and buy the stock REGARDLESS..Most "Option" expire worthless. So the option buy loses 100% of their money plus commissions.So,be VERY careful when buying options.
That's all I have time for now. Let me say that futures are a "hole nother story" but you can trade the "Major Stock Indexes ,gas,copper gold,oil,coffee @ the same kinda system is alot more "leveraged" instead of X100 it's X1,000(alot more risky).
Best of Luck...Read books,watch the stock vs the option.Learn ,Learn.
This is all just a little of what I've learned it's BY NO MEANS DIFINIATIVE!!!!

Answer 5

In binary options you will have the possibility to predict the movement of various assets such as stocks, currency pairs, commodities and indices. Learn how you can make money trading binary options https://tinyurl.im/aH4vz An option has only two outcomes (hence the name "binary" options). This is because the value of an asset can only go up or down during a given time frame. Your task will be to predict if the value of an asset with either go up or down during a certain amount of time.

Answer 6

An option is a right to buy(or sell) a security at a given price at a future date. Futures as far as I know have to do with commodities, and their delivery in the future at a set current price. Used to stabilize commodity markets originally, now used more speculatively in a variety of different goods.

Answer 7

Futures:It is a financial instrument which when you enter into a contract to buy you undertake to take delivery of certain quantity at a certain price at a future date. Each contract has specific size like 100 stocks of shares, certain bushels of wheat, certain ounces of precious metals, certain barrels of oil etc; which make a contract. You can have any number of contracts entered into.
In similar vain you can enter into a contract to sell certain amount of contracts of futures to sell at a particular price at a particular date in future.

Options: The type of options are Puts and Call options.
You can either be a buyer or seller also called a writer of calls. If you are a buyer of call option you undertake to buy certain amount of contracts of underlying security at a future date called the expiration date for a price called the exercise price. Here the buyer has the right but not the obligation to buy on that date called the expiration day. For this he pays a premium or price of option which is much smller than the actual price of the underlying asset.
Seller or writer on the othe hand contracts to sell certain amount of contracts at a future date at a price also calle exercise price.
Puts are contracts to sell the underlying stocks at a future date called put buying.
Put seller is contracting to buy the stock at a future date at a specified price as above.
Both Futures and options are called derivative instruments because they are instruments derived from other insturments like stocks, commodities, precious metals, oil etc;.
Options are valued using many methods. I have developed a few method and a few of them can be viewed in Google search:Options Mathew Cherian.

Answer 8

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Answer 9

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Terminology used in forwarding trading