Futures and Options (F&O): Types, Traders and Risks
About F&O
Futures and options (F&O) are derivative contracts fixing a price today for a transaction on a future date. They help hedge risk, and the underlying can be stocks, indices, commodities or ETFs.
Futures versus options
| Aspect | Futures | Options |
|---|---|---|
| Obligation | Must buy or sell on the agreed date | Right, not obligation |
| Risk | Higher; both parties liable | Buyer loses only the premium |
| Flexibility | Less | More; buyer can walk away |
- Call option: right to buy at a pre-set price.
- Put option: right to sell at a pre-set price.
Who trades
- Hedgers: cut price risk, e.g. a farmer locking a future crop price; physical delivery is common in commodities.
- Speculators: bet on price moves with long or short positions; usually cash settled.
- Arbitrageurs: exploit price gaps between markets, which helps stabilise prices.
Leverage and risk
- A small margin controls a larger position, magnifying profits and losses.
- Needs deep understanding of markets, the asset and economic news.
Exam angle
- Open interest: total outstanding contracts not yet settled, not the traded volume.
- Three trader types: hedgers, speculators, arbitrageurs.