Advantages of investing in Futures and Options

23 Feb 2022|

2 min read |

by ICICI Securities Team

Introduction

The financial markets offer a plethora of investment options. If you want access to additional assets or markets, derivatives are a great investment option.

What are derivatives?

Derivatives are financial instruments that derive their value from underlying assets such as commodities, currencies, gold, bonds, stocks, and market indices. When you trade in derivatives, you earn by estimating the future price of the asset. Futures and Options are common derivatives in which two parties enter into an agreement to buy or sell an asset at a pre-determined price. This transaction has to be done on or before a future date.

Additional Read: How to link Aadhar Card with your Demat Account?

What are Futures?

Futures are derivative contracts in which the buyer and seller make a pact to buy or sell the underlying asset at a predetermined date and price. Also known as Futures contracts, they allow buyers and sellers to lock in the price at which the trade will be executed.

By the expiry date, the trade must be executed at the predetermined price regardless of any changes. This serves as one of the main advantages of Futures contracts. Types of Futures include Index Futures, Stock Futures, Currency Futures, Commodity Futures, and Interest Futures.

What are Options?

Options are contracts in which the buyer and seller have to execute the trade – buy or sell - in the underlying asset at a pre-determined price and date. In this case, the buyer is not obliged to execute the contract, and can allow the option to expire. However, the seller is obligated to execute the contract if the buyer decides to proceed with it. This flexibility is considered as one if the main benefits of Options contracts. There are two kinds of Options - Call Options and Put Options.

Additional Read: How to transfer shares from one Demat Account to another online?

Derivatives are of great significance in the financial world owing to the various advantages they bring with them. These include:

Price determination

In financial markets, the direction of the asset’s price is unpredictable. Futures and Options allow buyers and sellers to decide on a specific price to trade in.

Market efficiency

Futures and Options help avoid imbalance of pricing in the market. How? The prices of these derivatives and the underlying assets tend to be in equilibrium. This helps increase efficiency in the financial markets.

Transaction costs

The cost of transacting in Futures and Options is lower as compared to the fees paid for trading shares and debentures. This reduces the transaction costs of these financial instruments.

Risk management

Since the value of Futures and Options is related to the value of the underlying asset, the contracts are used for hedging risks. That is, you can offset your losses if your contract value moves in the opposite direction.

Transferable risk

Futures and Options contracts allow investors, businesses, and municipalities to transfer the risk associated with them to other parties.

Conclusion

Trading in Futures and Options is now grabbing the attention of individual investors. At low transaction costs, you can access these financial instruments and hedge your position in the markets.

Additional Read: How to choose the best Demat Account

Disclaimer

ICICI Securities Limited has its registered office at ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400025, India, Tel No:- 022 - 2288 2460, 022 - 2288 2470. The non-broking products / services like iLearn and Financial Learning are not exchange traded products / services and ICICI Securities Ltd. is just acting as a distributor/ referral Agent of such products / services and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism. iLearn is not an exchange traded product/service of ICICI Securities Ltd. All disputes with respect to the activity on the platform would not have access to Exchange investor redressal or Arbitration mechanism.

ICICI Securities Ltd. is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. ICICI Securities Ltd. is a SEBI registered with SEBI as a Research Analyst vide registration no. INH000000990. Name of the Compliance officer (broking): Mr. Atul Agrawal, Contact number: 022-69997051, E-mail address: complianceofficer@icicisecurities.com Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. ICICI Securities Ltd. and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Such representations are not indicative of future results. The securities quoted are exemplary and are not recommendatory. AMFI Regn. No.: ARN-0845. PFRDA registration numbers: POP no -05092018. ICICI Securities Ltd. acts as a Composite Corporate agent having registration number -CA0113. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund, Corporate Fixed Deposits, Bonds, Alternate investment funds, Tax planning, Succession planning, NPS, IPO, Investment Advisory and Loans related services are not Exchange traded products and ICICI Securities Ltd. is acting as a distributor to solicit these products. Please note, Insurance related services are not Exchange traded products and ICICI Securities Ltd. is acting as a corporate agent to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The non-broking products / services like Research, etc. are not exchange traded products / services and all disputes with respect to such activities would not have access to Exchange investor redressal or Arbitration mechanism. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.

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