Futures and Options Basics: What They Are and Why They Carry Risk
Derivatives in one line
Futures and options are derivatives. Their value comes from another asset, such as a stock or an index.
Futures
A futures contract is an agreement to buy or sell something at a set price on a future date. It is traded with margin, which means you put up a part of the value. Gains and losses are based on the full contract value.
Options
An option gives the buyer the right, but not the duty, to buy or sell at a set price before a set date. The buyer pays a premium. Option sellers can face large losses.
Why they carry risk
Margin and leverage can make losses bigger than the money you first put in. Options can lose value quickly as expiry gets closer. Rules, margins and lot sizes can change, so always check the current rules on the official exchange websites.
Before you start
Learn the basics of the cash market first. Understand margin, expiry and lot size. Practise with paper trading, and use only money you can afford to lose.
Key points
- Futures and options are derivatives.
- Leverage can increase losses as well as gains.
- Many beginners lose money in derivatives.
- Study and practise before using real money.
Trading involves risk. This article is for education and information only. It is not investment advice, and no course or method promises a return or removes the risk of loss.