Zebu blog

Tag: Financial Instruments

  • Which Is Riskier: Trading Futures Or Trading Options?

    Futures vs options trading always seem to be up for discussion. Traders talk and talk about whether futures or options are riskier. In any case, it’s important to think about how much risk you can handle before you take a side in the ongoing debate. Also, once you know exactly what futures and options are, it will be clear which one has more risks than the other.

    Trading is a risky business, that’s why you should try with new-age technology. We at Zebu, a share trading company offer our customers the best online trading platform to help with their online stock trading journey.

    A Brief Explanation of Options

    A contract between a buyer and a seller is an option. It gives the owner the right, but not the obligation, to buy or sell an asset at an agreed-upon price within a certain time frame. Options are contracts that are parts of a larger group of financial instruments called derivatives. They can be used on indices, stocks, and exchange-traded funds (ETFs).

    On the stock market today, options get their value from the underlying securities, such as stocks. When you trade stocks, all you are doing is trading ownership in a publicly traded company. Options contracts, on the other hand, let you trade the right or obligation to buy or sell any underlying stock. If you own an option, you do not automatically own the thing that the option is based on. Also, it doesn’t give you any rights to dividends.

    Futures: A Short Explanation

    Futures are also contracts or agreements to buy or sell certain stocks or commodities at a certain time in the future. In a futures contract, the buyer and seller agree ahead of time on prices, quantities, and the dates of future deliveries.

    You can either buy or sell in a futures contract. If the price goes up, buyers make money because they bought the asset when it was cheaper. If the prices go down, the people who sold at higher prices will make money.

    A Quick Look at Futures, Options, and Risks

    If you do online trading, you may know some things about how the markets work. For example, if you trade and invest in stocks, you know that you need to open a demat account. In the same way, you would know that futures and options are derivatives if you knew anything about them. They also use leverage, which makes them riskier than trading stocks. Futures and options both get their value from the asset that they are based on. Futures and options contracts make money or lose money based on how the price of the asset they are based on changes.

    There is enough risk in the share market today. Your risk tolerance may be a factor in deciding between futures and options, but it’s a given that futures are riskier than options. Even small changes in the price of an underlying asset can affect trading. This is especially true when trading options. Even though both have the same amount of leverage and capital at risk, futures are riskier because they are more likely to change. You need to know that leverage is like a “two-edged sword.” You can make money quickly and lose it just as fast. In terms of futures, you can make money quickly or lose it in an instant. This is not the case with options trading.

    With options, you can buy either “put” or “call” options while you are trading online. The most you can lose is the amount of money you have put into the options. If your prediction is way off and your options are worthless by the time your contract is up, you may have some bad luck, but you will only lose the premium you pay for the options.

    With futures contracts, on the other hand, you have unlimited liability. You will have to make a margin call to add more money to your account to make up for the daily losses. If you lose money every day, you may have to keep going until the underlying asset stops going against the wind. If you put most of your money into futures contracts and don’t have enough money to cover your margin calls, you could even go into debt. Does all of this sound too risky? You don’t have to worry. Technically, futures are not inherently riskier. Instead, it is the fact that futures can use a higher level of leverage that makes both profits and risks bigger. You can easily borrow money to buy stocks and get 5:1 leverage. With futures, you could get 25:1, 50:1, or even more. So, even the smallest moves can lead to huge profits or huge losses, depending on what was invested.

    Things to think about

    If traders had to choose between trading futures and trading options in the world of online trading, options would be the more interesting choice. In options, the most you can lose is what you put in the first place. Options trading might be the better choice, especially if you use the spread strategies that options give you. If you plan to hold on to trades for a long time, bull call spreads and bear put spreads can increase your chances of success. Futures are riskier because they use a higher level of leverage and a smaller amount of cash to control assets with a higher value. This means that the amount you can lose may be higher than the amount you put in at first. Also, some things about the market could make it hard or even impossible to sell or hedge a certain position.

    Try our new-age technology now! We at Zubu, a share trading company offer our customers the best online trading platform to help with their online stock trading journey.

  • Why You Should Know Time Value Before Trading In Options

    When it comes to trading options, the time value of an option is one of the most basic and important things to understand. In technical terms, it is called “Theta,” which shows how an option’s value decreases over time. Before we get into the details of time value and time decay, let’s take a quick look back at what options are and how they work.

    Before we get into understanding the importance of time value in trading, we should understand that the right technology is equally important. As a share broking company, we offer our clients a seamless online trading platform and also provide them with the lowest brokerage on intraday trading, to make their journey as a trader as smooth as possible.

    So, what are options really all about?

    As the word “option” suggests, it is a right that doesn’t have to be used. Unlike a futures contract, which is both a right and a duty, this is not the case. The buyer of the option has the right to buy or sell the underlying asset at an agreed-upon price (strike price). If the price change goes in the buyer’s favour, he will make money, but if the price change goes against him, he will not use the option. That doesn’t seem fair to the person who sold the option, does it?

    Not at all! Since the person who buys the option has a right but no obligation, the person who sells the option has a duty but no right. The seller won’t do that for free, that much is clear. The person who buys an option pays a certain fee to the person who sells the option for the right to do something without having to do it. This fee is called an “option premium,” and it is what gets traded on the NSE when you buy and sell options. The buyer of the option pays the option premium to the seller of the option as a reward for taking on the obligation without the right.

    Options can be either “call” or “put.”

    Call options give you the right to buy something, while put options give you the right to sell something. You buy a call option if you think the price of a stock will go up. If you think the price of a stock will go down, on the other hand, you will buy a put option. Even though it sounds easy, it’s not as easy as it sounds.

    Getting to the heart of an option’s intrinsic value and time value.

    Before you can understand the idea of time value, you need to know about the three types of options below.

    1. An In-The-Money (ITM) option is a contract for an option that has an intrinsic value that is greater than zero. If the market price of the Nifty is higher than the strike price, a call option on the Nifty is in the money. If the market price of the 17000 Nifty call option is Rs.70 and the spot Nifty is at 17100, then the intrinsic value of the Nifty call will be Rs. 100 (17100-17000). The option’s time value will be the remaining value, which is Rs.30. So, of the Rs.70 option premium that is being quoted on the market, Rs. 100 is due to intrinsic value and Rs. 30 is due to time value. If the spot price of the Nifty is lower than the strike price of the put option, the option is in the money.

    2.An “at the money” (ATM) option is a contract for an option that has a value of zero. If the market price of the Nifty is the same as the strike price, it will be an ATM for a call option on the Nifty. Since there is no intrinsic value, the time value is the only thing that makes the option worth anything.

    3. Out-of-the-Money (OTM) options are option contracts where the market price is lower than the strike price for a call option or higher than the strike price for a put option. According to our formula, the intrinsic value will be negative, but since the intrinsic value can’t be negative, we’ll treat it as zero. So, only time value will make up the option premium.

    At the beginning of the month, ATM options have the highest time value, followed by ITM options and then OTM options. In the long run, the time value of all three options will tend toward zero as the expiration date gets closer. Even though the OTM and ATM options themselves have no value, the option premium for ITM options will still be positive because they have intrinsic value.

    Why is time value such an important part of trading options?

    An option is a wasting asset because its time value tends to go to zero as its expiration date gets closer. This loss of time is also called “Theta.”

    Time and volatility are two of the most important parts of time value. For both call options and put options, the time value goes up as the time to expiration goes up. Even if the option is still Out of the Money, a rise in volatility can cause the time value to rise. The person who buys the options bets that volatility will make the time value go up, while the person who sells the option hopes that the time value will work in his favour so that the option expires worthless. This is the main idea behind trading with options.

    As a share broking company, we offer our clients a seamless online trading platform and also provide them with the lowest brokerage on intraday trading, to make their journey as a trader as smooth as possible. Contact us to know more.