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Online Futures & Options Terminologies 

Overview

Online futures and options trading offer investors a unique opportunity to profit from price movements in financial markets. However, navigating the world of futures and options can be daunting, especially for beginners. Understanding the key terminologies is essential for successful trading. In this article, we will delve into the various terms and concepts related to online futures and options trading to help you gain a better understanding.

Futures Trading Terminologies

Futures Contract: A futures contract is a standardized agreement to buy or sell an underlying asset at a predetermined price on a specified date in the future.

Contract Size: The contract size refers to the quantity of the underlying asset that is traded in a single futures contract.

Margin: Margin is the amount of money that traders must deposit with their broker to open a futures position. It serves as collateral to cover potential losses.

Leverage: Futures trading allows traders to control a large position with a relatively small amount of capital, thanks to leverage. However, leverage can amplify both profits and losses.

Settlement: Futures contracts can be settled in two ways: physical delivery, where the underlying asset is delivered to the buyer, or cash settlement, where the difference between the contract price and market price is settled in cash.

Expiration Date: The expiration date is the date on which the futures contract expires. After this date, the contract is no longer valid.

Options Trading Terminologies

Option Contract: An option contract gives the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price within a specified period.

Call Option: A call option gives the holder the right to buy the underlying asset at a specified price before the expiration date.

Put Option: A put option gives the holder the right to sell the underlying asset at a specified price before the expiration date.

Strike Price: The strike price is the price at which the underlying asset can be bought or sold when exercising an option contract.

Premium: The premium is the price paid by the option buyer to the option seller for the right to buy or sell the underlying asset.

In-the-money (ITM): An option is said to be in-the-money if exercising the option would result in a profit. For a call option, this means the strike price is below the current market price. For a put option, it means the strike price is above the current market price.

Out-of-the-money (OTM): An option is said to be out-of-the-money if exercising the option would result in a loss. For a call option, this means the strike price is above the current market price. For a put option, it means the strike price is below the current market price.

Expiration Date: Similar to futures contracts, options contracts also have an expiration date, after which the contract is no longer valid.

Risk Management Strategies

Stop-Loss Order: A stop-loss order is an order placed with a broker to sell a security when it reaches a certain price. It helps traders limit their losses.

Hedging: Hedging is a risk management strategy that involves taking offsetting positions to reduce the risk of adverse price movements in the market.

Diversification: Diversification involves spreading investments across different assets to reduce risk. This can be achieved by trading multiple futures contracts or options contracts.

Conclusion

Online futures and options trading offer exciting opportunities for investors to profit from price movements in financial markets. 

Understanding these basic futures jargon is crucial for anyone looking to trade futures contracts or engage in hedging strategies. By familiarizing yourself with these terms, you can better navigate the complexities of the futures market and make more informed trading decisions.

Frequently Asked Questions

What is meant by Futures Contracts ?

Futures contracts are financial agreements where a buyer purchases an asset in advance at a preset rate. These contracts are standardized for trading on a future date but at a price set earlier.

What is meant by Contractual Obligations?

In a futures contract, the buyer is obliged to buy the asset, and the seller is obliged to deliver the asset. However, actual delivery of the asset is rare, as futures are primarily used for price speculation or hedging purposes.

What is meant By Hedging ? Explain Long & Short Hedges?

Hedging involves locking down a price in advance, which will be the price of the asset at a future date. This helps remove uncertainty in price due to fluctuations, making planning, investing, and fund distribution easier.

Long and Short Hedges: A long hedge is used by a company that is certain to buy an asset in the future, while a short hedge is used by a company certain to sell an asset in the future. These hedges help manage the risk of price fluctuations.

What is meant by Price Speculation and Derivative Contracts?

Price Speculation: Price speculation involves forecasting the price of an asset in the future financial market. Speculation is essential for hedging, as it provides the future price needed for effective risk management.

Derivative Contracts: Futures contracts are considered derivative contracts because their value is derived from the value of an underlying asset. Since futures prices are based on the future of the asset, they are categorized as derivative contracts.

What is meant by Forward Contracts?

Along with futures contracts, forward contracts are also widely used in commodity trading. These contracts are similar to futures contracts but are not standardized and are traded over-the-counter.

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