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What are Futures and Options?

Futures and options are types of derivative contracts that allow investors to speculate on the future price movements of underlying assets, such as stocks, commodities, or indices. These financial instruments offer opportunities for hedging, leveraging, and diversifying investment portfolios.

Futures Contracts

A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific date in the future. Futures are standardized and traded on exchanges, providing transparency and liquidity.

Benefits of Futures Contracts

Leverage:

Investors can control large positions with a relatively small amount of capital.

Hedging:

Businesses and investors use futures to hedge against price volatility in commodities, currencies, and other assets.

Liquidity:

Futures markets are highly liquid, allowing for easy entry and exit of positions.

Standardization:

Futures contracts are standardized, ensuring uniformity in terms of contract size, expiration date, and other specifications.

How Futures Work

Entering a Contract:

An investor agrees to buy or sell an asset at a future date for a specific price.

Margin Requirements:

Traders must maintain a margin account with a minimum balance to cover potential losses.

Settlement:

At the contract's expiration, the contract is settled either through physical delivery of the asset or cash settlement.

Options Contracts

An options contract gives the buyer the right, but not the obligation, to buy or sell an asset at a specific price before a certain date. There are two types of options: calls and puts.

Call Option: Gives the holder the right to buy the asset.

Put Option: Gives the holder the right to sell the asset.

Benefits of Options Contracts

Flexibility:

Options provide the flexibility to speculate on price movements without the obligation to execute the trade.

Limited Risk:

The maximum loss is limited to the premium paid for the option.

Hedging:

Options can be used to hedge against adverse price movements in an underlying asset.

Income Generation:

Selling options can generate income through premiums.

How Options Work

Purchasing an Option:

An investor buys a call or put option by paying a premium.

Strike Price:

The predetermined price at which the option can be exercised.

Expiration Date:

The date by which the option must be exercised.

Exercising the Option:

The holder decides whether to buy or sell the asset at the strike price before the expiration date.

Risks Associated with Futures and Options

Leverage Risk:

While leverage can amplify gains, it also magnifies losses.

Market Risk:

Prices can move unfavorably, resulting in significant losses.

Complexity:

Derivatives can be complex and require a thorough understanding of the markets and strategies.

Time Decay:

For options, the value decreases as the expiration date approaches.

Conclusion

Futures and options are powerful financial instruments that offer various strategies for speculation, hedging, and income generation. By understanding their mechanics, benefits, and risks, investors can make informed decisions and effectively incorporate these derivatives into their investment portfolios.

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As you are aware, under the rapidly evolving dynamics of financial markets, it is crucial for investors to remain updated and well-informed about various aspects of investing in securities market. In this connection, please find a link to the BSE Investor Protection Fund website where you will find some useful educative material in the form of text and videos, so as to become an informed investor.
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ATTENTION INVESTORS

1.Stock broker/Depository participant can accept securities as margin from clients only by way of pledge in the depository system w.e.f. September 1, 2020.
2.Update your mobile number & email Id with your stock broker/depository participant and receive OTP directly from depository on your email id and/or mobile number to create pledge.
3.Pay 20% upfront margin of the transaction value to trade in cash market segment.
4.Investors may please refer to the Exchange's Frequently Asked Questions (FAQs) issued vide circular reference NSE/INSP/45191 dated July 31,2020 and NSE/INSP/45534 dated August 31,2020 and other guidelines issued from time to time in this regard.
5.Check your Securities /MF/ Bonds in the consolidated account statement issued by NSDL/CDSL every month.
6.All the clients are requested not to blindly follow these unfounded rumours, tips etc. and invest after conducting appropriate analysis of respective companies. Prevent Unauthorised transactions in your account. Update your mobile numbers/email IDs with your stock broker/Depository participant. Receive information of your transactions directly from Exchange/Depository on your mobile/email at the end of the day

.......... Issued in the interest of Investors

NIRMAN SHARE BROKERS PVT. LTD.

SEBI Registration No.INZ000197638-BSE Cash/F&O/CD (Member ID:956),MCX (Member ID 45395)
NSE Cash/F&O/CD (Member ID:12309)
CDSL (DP ID 12059500): IN-DP-CDSL-494-2008

COMPLIANCE OFFICER

Mr.Tushar Suryavanshi
E-mail : tushar.s@nirmanbroking.com
Tel : 0755-4311111

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