Options and Futures

Subject – Economy

Context – Freak trade at NSE, yet again

Concept –

Options and futures are similar trading products that provide investors with the chance to make money and hedge current investments.

Options

An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
They tend to be fairly complex, options contracts tend to be risky. Both call and put options generally come with the same degree of risk. When an investor buys a stock option, the only financial liability is the cost of the premium at the time the contract is purchased.
Options are based on the value of an underlying security such as a stock. As noted above, an options contract gives an investor the opportunity, but not the obligation, to buy or sell the asset at a specific price while the contract is still in effect. Investors don’t have to buy or sell the asset if they decide not to do so.

Futures

A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date unless the holder’s position is closed prior to expiration.
Options may be risky, but futures are riskier for the individual investor. Futures contracts involve maximum liability to both the buyer and the seller
A futures contract requires a buyer to purchase shares—and a seller to sell them—on a specific future date, unless the holder’s position is closed before the expiration date.
Futures contracts tend to be for large amounts of money. The obligation to sell or buy at a given price makes futures riskier by their nature.
They are preferred by speculators.

Freak Trade

A trade is considered a freak trade generally when a large company or trader makes an erroneous trade (incorrect), but this trade is so incorrect and massive that it often affects that stock at large(the same applies for indices).
One of the ways a trader can cover from a large loss due to a freak trade while also entering/exiting immediately is to use limit orders, says Zerodha founder Nithin Kamath.

Difference between BSE and NSE –