Share futures and options fall under the derivatives market. When you make profits by making a bet on the future value of any asset, it is called derivative. So, futures and options work on a similar principle.
Let’s first understand the definition of futures and options.
Share Future is an agreement to buy or sell a specified quantity of a particular equity share for a future date at a price agreed upon between the buyer and seller. The share futures have standardized specifications in terms of settlement method, expiry date, market lot, unit of price quotation and tick size.
Let’s say, ONGC share price (spot price) is Rs100 and cost of carry is 5%. So, future price of 1 month agreement will be 100+100*0.05*30/365 = 100+0.41=100.41.
In case of share future, both buyer and seller have obligation to buy and sell the share. However, in case of Share Options, the buyer has the right and not the obligation to buy and sell the share. The price of Share Futures is dependent primarily on the prices of the underlying share whereas the volatility of price of Share Options affects the prices of the underlying share.
So, if ONGC share price at call option is bought at a strike of Rs200 and then at the time of exercise, the price is Rs225, then you receive cash of Rs25. So, you really don’t get extra share, but you actually earn extra money.
The stock market arbitrageurs are constantly watching out futures and options. They are simultaneously buying and selling shares to leverage the opportunity of risk-free profits, no matter how small it is.
Share Futures and Options can affect share prices in the short periods. Let’s say, investors optimistic about the prices in the near future. Due to this positive sentiment, there is increase in the volume ‘Buy’ contracts as compared to ‘Sell’ contracts in the derivatives market. The investors in the cash market tend to follow a similar route and my start purchasing shares expecting higher prices. When the buying increases in large volume, the share prices go up.
Share Futures and Options reduce the volatility impact of large quantity of market orders.
Let’s first understand the definition of futures and options.
Share Future is an agreement to buy or sell a specified quantity of a particular equity share for a future date at a price agreed upon between the buyer and seller. The share futures have standardized specifications in terms of settlement method, expiry date, market lot, unit of price quotation and tick size.
Let’s say, ONGC share price (spot price) is Rs100 and cost of carry is 5%. So, future price of 1 month agreement will be 100+100*0.05*30/365 = 100+0.41=100.41.
In case of share future, both buyer and seller have obligation to buy and sell the share. However, in case of Share Options, the buyer has the right and not the obligation to buy and sell the share. The price of Share Futures is dependent primarily on the prices of the underlying share whereas the volatility of price of Share Options affects the prices of the underlying share.
So, if ONGC share price at call option is bought at a strike of Rs200 and then at the time of exercise, the price is Rs225, then you receive cash of Rs25. So, you really don’t get extra share, but you actually earn extra money.
The stock market arbitrageurs are constantly watching out futures and options. They are simultaneously buying and selling shares to leverage the opportunity of risk-free profits, no matter how small it is.
Share Futures and Options can affect share prices in the short periods. Let’s say, investors optimistic about the prices in the near future. Due to this positive sentiment, there is increase in the volume ‘Buy’ contracts as compared to ‘Sell’ contracts in the derivatives market. The investors in the cash market tend to follow a similar route and my start purchasing shares expecting higher prices. When the buying increases in large volume, the share prices go up.
Share Futures and Options reduce the volatility impact of large quantity of market orders.
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