In Option - Put Option and Call Option

Put option - means right to sell in future when the price of the share is below the target/strike price.

Call Option - means right to buy in future when price is above the target/strike price.

But there is no any obligation on the part of the seller in put option and on the part of the buyer in call option.
Also while entering into options one has to pay the premium amount to the other contracting party.

Talking about Future - it means contract has been entered into between the two persons that one person will buy/sell stock from/to another person in future.

Answered by HARSHAL , an ibibo Citizen, at 6:38 PM on April 03, 2008

A 'Future' is a contract to buy or sell the underlying asset for a specific price at a pre-determined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make a promise to transfer the asset to the buyer of the future at a specified price at a particular time. Every futures contract has the following features:

Buyer
Seller
Price
Expiry
Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.

The difference between the price of the underlying asset in the spot market and the futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is usually negative, which means that the price of the asset in the futures market is more than the price in the spot market. This is because of the interest cost, storage cost, insurance premium etc., That is, if you buy the asset in the spot market, you will be incurring all these expenses, which are not needed if you buy a futures contract. This condition of basis being negative is called as 'Contango'.

Sometimes it is more profitable to hold the asset in physical form than in the form of futures. For eg: if you hold equity shares in your account you will receive dividends, whereas if you hold equity futures you will not be eligible for any dividend.

When these benefits overshadow the expenses associated with the holding of the asset, the basis becomes positive (i.e., the price of the asset in the spot market is more than in the futures market). This condition is called 'Backwardation'. Backwardation generally happens if the price of the asset is expected to fall.

It is common that, as the futures contract approaches maturity, the futures price and the spot price tend to close in the gap between them ie., the basis slowly becomes zero.

Options

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put' option.

A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is called 'strike price'. It should be noted that while the holder of the call option has a right to demand sale of asset from the seller, the seller has only the obligation and not the right. For eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.

Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the buyer. Here the buyer has the right to sell and the seller has the obligation to buy.

So in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the contract has only the obligation and no right. As the seller of the contract bears the obligation, he is paid a price called as 'premium'. Therefore the price that is paid for buying an option contract is called as premium.

The buyer of a call option will not exercise his option (to buy) if, on expiry, the price of the asset in the spot market is less than the strike price of the call. For eg: A bought a call at a strike price of Rs 500. On expiry the price of the asset is Rs 450. A will not exercise his call. Because he can buy the same asset from the market at Rs 450, rather than paying Rs 500 to the seller of the option.

The buyer of a put option will not exercise his option (to sell) if, on expiry, the price of the asset in the spot market is more than the strike price of the call. For eg: B bought a put at a strike price of Rs 600. On expiry the price of the asset is Rs 619. A will not exercise his put option. Because he can sell the same asset in the market at Rs 619, rather than giving it to the seller of the put option for Rs 600.

Answered by subu , an ibibo Specialist, at 1:12 PM on March 31, 2008

an option is the right,not the obligation to buy or sell something on a specified date at a specified price.
In the stock mkt, an option is a contract between 2 parties to buy or sell specified no. of shares at a later date for an agreed price. in option trading three parties r there:option buyer, seller & the broker.two types of options r there:call(to buy) and put(to sell). each option has a fixed striking price.
Future is a financial contract to buy or sell their assets at a future date to eliminate the risk of change in price by that date.
market index future r directly related with the stock mkt. it is an obligation and not an option. no physical delivery of stock is made.

Answered by armaani , an ibibo Citizen, at 10:40 AM on March 31, 2008

infew days it will be o.k

Answered by bansi , an ibibo Master, at 2:10 PM on March 28, 2008

Futures and options represent two of the most common form of "Derivatives". Derivatives are financial instruments that derive their value from an 'underlying'. The underlying can be a stock issued by a company, a currency, Gold etc., The derivative instrument can be traded independently of the underlying asset.
The value of the derivative instrument changes according to the changes in the value of the underlying.

Answered by swadesh , an ibibo Specialist, at 11:04 AM on March 28, 2008

Future are contracts guaranteeing delivery of specified financial instruments on a future date, at a predetermined price. The financial instruments traded in the U.S. futures markets consist of foreign currencies and debt securities e.g., TREASURY BILLS, long-term U.S. Treasury BONDS, COMMERCIAL PAPER, etc. The futures contracts on debt securities are commonly known as interest-rate futures. They offer companies, banks and institutions a means to insulate themselves from adverse interest rate movements through HEDGING. The objective behind hedging is to establish in advance, a certain rate of interest for a given time period. That apart, financial futures offer considerable profit potential which attracts speculators and individual investors too.

Options are a contract that gives the holder the right to buy (‘Call Option’) or sell (‘Put Option’) a certain number of shares of a company at a specified price known as the ‘Striking Price’ or ‘Exercise Price’. American options may be exercised during a certain time period, which extends up to what is known as the ‘Expiration Date’. Exchange-traded options in the U.S. are in denominations of 100 shares. The attraction of buying options is a potentially large profit on a relatively small investment. The maximum possible loss is the price paid for the option, known as the ‘Premium’. The premium is paid by the option buyer to the option writer (seller) who keeps the money, whether the option is exercised or not. The buyer is under no obligation to exercise his right and may simply let the option expire. However, by selling a call or a put, the writer obligates himself to deliver or buy shares if the option is exercised. Importantly though, the buyer or the writer may independently terminate their outstanding positions before the expiration date, by executing offsetting transactions. The value of an option comprises a time value and an INTRINSIC VALUE, the latter resulting from the price of the underlying stock. As the expiration date approaches, the time value converges to zero.

Answered by vikas kumar , an ibibo Advisor, at 7:53 PM on March 27, 2008