Derivatives explained - futures, options, premium, Greeks and strategies.
A futures contract is a standardised legal agreement to buy or sell an underlying asset at a predetermined price on a specified future date, traded on a recognised exchange.
An option is a contract giving the buyer the right - but not the obligation - to buy or sell an underlying asset at a predetermined price before or on a specified expiry date.
A call option is a contract that gives the buyer the right, but not the obligation, to purchase an underlying asset at a fixed strike price before or on expiry.
A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a predetermined strike price on or before expiry.
Option premium is the price paid by a buyer to an option seller, comprising two components - intrinsic value (real, exercise-based worth) and time value (the extra amount reflecting the possibility of future profit before expiry).
Open interest is the total number of outstanding derivative contracts - futures or options - that have not yet been settled or closed by an offsetting trade.
Implied volatility (IV) is the market's forward-looking estimate of how much an asset's price may move, extracted from current option prices rather than historical data.
Option Greeks are mathematical measures that describe how an option's price changes in response to shifts in underlying price, time, volatility, and interest rates.
Hedging is the practice of using financial instruments, typically derivatives, to offset or reduce the risk of adverse price movements in an existing investment position.
A covered call is an options strategy where an investor who holds shares sells a call option on those same shares to collect premium income.
A protective put is an options strategy where an investor buys a put option on a stock or index they already own, limiting downside loss while preserving upside potential.
A bull call spread is an options strategy where a trader buys a lower-strike call and sells a higher-strike call on the same underlying and expiry to profit from a moderate upward move at reduced cost.
A bear put spread is a limited-risk, limited-reward options strategy that profits from a moderate decline in the underlying asset's price by buying a higher-strike put and selling a lower-strike put.
A straddle is an options strategy where a trader simultaneously buys or sells a call and a put at the same strike price and expiry to profit from large price moves or stable markets.
A strangle is an options strategy that involves buying or selling an out-of-the-money call and an out-of-the-money put on the same underlying asset with the same expiry.
An iron condor is a four-leg options strategy that combines a bull put spread and a bear call spread to earn premium income when the underlying asset stays within a defined price range.
A butterfly spread is a neutral, limited-risk options strategy that combines bull and bear spreads to profit when the underlying asset stays near a specific price at expiry.
A calendar spread is an options strategy that buys and sells contracts on the same underlying asset and strike price but with different expiry dates, aiming to profit from differential time decay.
ITM, ATM and OTM describe an option's moneyness - the relationship between the option's strike price and the current market price of the underlying asset.
Nifty options are standardised derivative contracts on the Nifty 50 index traded on NSE, giving buyers the right - but not the obligation - to buy or sell the index at a predetermined price before expiry.
Bank Nifty options are exchange-traded derivative contracts on NSE that give the buyer the right to buy or sell the Bank Nifty index at a specified strike price before expiry.
A futures rollover is the act of closing a near-month futures contract before expiry and simultaneously opening the same position in a later-expiry contract to maintain continuous market exposure.
Physical settlement is the process by which the buyer and seller of a derivative contract exchange the actual underlying asset - shares, commodities, or currency - instead of settling in cash at expiry.
A cash-settled contract is a derivative that closes at expiry by transferring the profit or loss in cash rather than delivering the underlying asset.
An options chain is a real-time table showing all available strike prices for a contract, with their corresponding call and put premiums, open interest, volume, and implied volatility.
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