hi everyone welcome to today's video so as a stock market investor you will think that you only make money when the markets are going up for example if you purchase ITC at 300 rupees you will be making money when ITC goes up to let's say 310 rupees 320 rupees or 340 rupees you will book The Profit and you will feel very happy that hey I have made the profits but have you thought about the fact that when the markets are moving sideways so they are not going up they're not going down they are moving sideways or when the markets are going down is there a way for you to make money the answer is yes so on this video I'm going to help you understand about Futures and options at least I will give you basic introduction about that topic so you understand what is a call option what is a put option what is underlying derivative all this stuff and also please check some of my courses on wisdom hatch I'm starting a new batch it's going to be a completely live batch and I'm going to talk about there also about Futures and option in slightly more advanced manner so let us get the discussion started and I will explain this complex Topic in seven very easy to understand points so Point number one that you need to understand is the difference between underlying and derivative now what exactly is an underlying and what exactly is a derivative let us try to understand this by using a simple example so what example will we pick so let's pick the example of Apple so if you have an apple so that is a underlying it itself has some value you can go sell that Apple you can go buy that Apple but if you're making an apple juice out of it what are you doing you are deriving apple juice from Apple so that becomes a derivative so just to put things in context Apple juice would be a derivative and apple would be the underlying now let's pick second example so let's pick wheat now from wheat what can you make you can make roties in Mexico people make tortillas in France people make croissant or cant C I don't know gold bread right so that's what they make so from wheat you can make a lot of things so what is the underlying the underlying will be wheat but if you're looking at roties or if you're looking at tortillas or if you are looking at Gold bread or C whatever we call it that becomes a derivative so I hope this first point Isle that what is an underlying and what is a derivative now in finance context or stock market context what exactly does it mean and how does this relate with Futures and options now Futures and options are a type of a derivative so let me give you a finance example so on the stock market you can trade the contract of an underline called as nifty50 or Reliance so these becomes what these become the underling now you can buy a derivative of it so you can buy call options or put options for the underlyings and underlyings can be what it can be nifty50 it can be Bank Nifty it can be Reliance it can be HDFC or listed stocks which come under fno domain so I hope this first point is clear that what is the difference between underline and derivative so for example on the stock market you can go and buy HDFC stock or Reliance stock but in the Futures and options Market you can buy the derivatives of these underlines now comes Point number two that how many types of derivatives are there so there are thousand different types of derivatives but from a stock market perspective there are four different types of derivatives so the first type is called as forwards then there is something called as Futures then there is something called as options and then there is something called as swaps now in India the forwards and swaps are not very popular and we primarily deal in futures or in options now let me just quickly take a minute to explain the difference between Futures and options now let's first and foremost pick Futures and here I'm putting an entire snippet you can go and read the technical definition but in very simple words Futures is basically a contract so let's say that I'm a wheat farmer and you are a very rich businessman so you are worried about the fact that you know what wheat prices might go up in the future and if that happens then probably if you are running an atach Chui or if you running like some kind of a business associated with wheat your cost will increase so what you would try to do is that you would try to lock in the prices so you and I might get into a contract you will say that akhat you are a farmer you are selling your wheat at 5 rupees a kg but you do a contract with me I will buy your wheat at 6 rupees per kg but I will buy that weat in 2023 from you not in 2022 so we lock in the prices today I will be very happy I will say that okay fine cool not a problem then 2023 comes weat prices become 8 rupees but since I have promised you that I'm going to sell you at 6 rupees guess what I'll have to sell you at 6 rupees and you have to buy it at 6 rupees now opposite can also happen that 2023 arrives the weed prices become 3 rupees but we are in a contract a Futures Contract that you are going to buy wheat from me at 6 rupees so who benefits in 2023 you tell me in the comment box in this scenario so I hope you understand what is a Futures Contract now let's move on to understanding what exactly is an option and let me explain that by using a very practical example so how do you generally buy a flat so let's say that you're trying to buy a flat in goodgo your first step will be that you'll go meet the Builder look at the place look at the society you will like the flat you will say that okay I like the fat you will bargain a little bit if you have your mom with me she will bargain a little bit more so my mom Bargains and at the end of the day you will reach some kind of a deal and what is the step or first prominent step that you will take from your side you are going to give something called as token money so let's assume that you're going to buy that flat at 1 CR rupe what is the token amount that the Builder will ask so the Builder might ask that okay give me 1 lakh rupee I am going to lock in this price for you and in the next 2 3 months just finalize the deal so that token of 1 lakh rupee that you have given it becomes an option for you so what is the option that you have that in that two Monon time if your mind changes that hey I'm not going to buy this place I'm okay losing this one lak rupe deposit that's gone so that 1 lakh rupee becomes an option for you and what decisions can you take with that 1 lakh rupe so let me draw it out it will help you understand it more so this 1 lakh rupee gives you what option it gives you a waiting period of let's say 2 months right and in this two months you can make three calls right so one you can buy the house outright as has been agreed on the deal that hey Builder says that he give me more money that give me 99 lakh rupes more and this house is yours so you can outright go and buy it the second key power that that 1 lakh rupee token amount gives you is that you get to wait and watch so you can hold your decisions for how many months 2 months this is not infinite amount of time so for 2 months you can wait and watch and if something bad happens in that Society then of course you will deny and not buy it at all and third option is that after that wait and watch period gets over you get to make the final decision of even not buying that property anymore so here is the theoretical definition of an option it says that options are Financial derivatives that give buyers the right but not the obligation to buy or sell an underlying asset at an agreed upon price and date so this is what the theoretical definition of options is but by using the example that I told you hopefully you'll be able to rationalize this definition and keep it in your mind so basically whenever you hear the word derivatives in India it is talked about in two sense one it might be talked about in the scenario of Futures Contract or in the scenario of options contract what is the difference between Futures and options I hope that through previous section you got that clarity now comes the third and the most important Point as to why derivatives are used in the first place this is very very important please listen to this section very carefully so there are two options that you get to trade in the fno market one is called as building hedging strategies and second is called as building speculation strategies now let me explain the difference by using a very easy to understand example so let us use the example of GSW steel and maruti so what does GSW steel does it manufactures steel and what does maruti do maruti procures or buys that steel and makes cars what is maruti worried about maruti is worried about steel price increases because if the steel price goes up then it might not be able to pass on on the price increase to its customer and its profit margins will shrink so what will maruti think that you know what if I build new factories if I hire more people and if just the steel price goes up then my business is messed up now on the flip side what is it that GW steel might be scared of so they might be scared of the fact that you know what what if the steel prices fall so in such a scenario my business will go under so jsw steel has no incentive to increase its capacity build new factories hire more people Etc and on the flip side maruti is too worried about the in in the steel price so they will not undertake capacity expansion so both the parties are too scared about the change in the underlying and therefore are not taking capacity expansion so what is the solution the solution number one is that both the parties enter into a Futures Contract at a reasonable price so let's assume that 1 kg of Steel is costing 1,000 rupees so maruti will be okay with a price increase of 150 this might also be a winning proposition for jsw steel also for next year's prices so they will lock in this contract this becomes a future contract so this is sensible move for both the parties and at least for next year both the companies will expand their capacity the second option could be that maruti can go and buy an insurance against the steel price increases or GSW can go and buy an insurance against the steel price fall now comes the question that how do you buy insurance in the stock market this I will explain on the next point but let me very quickly tell you about the philosophy with which both these companies are operating what they are doing is that they are using Futures and options in order for hedging or minimizing their risk speculation simply means that you know what we are going to do satazi that which direction the price is going to move there is a reason why 95% of Traders do not make any money there is a lot of fanciness around trading options and trading this and you know short the market this that no 95% of Traders are not making any money in fact they are making negative money almost 99% Traders do not even beat fixed deposit returns so that is how bad the situation is important message is that please do not speculate in the fno market only hedge your risk and use Futures and options for hedging not speculation so this brings me to the fourth point that how do you exactly buy an insurance in the stock market okay you need to buy an option in order to buy an insurance now what do I mean by buying an option so there are two types of options that are there so let me give you a very quick explanation of these two type of options and then I will share an example so the first option type is called a call option and the second option type is called as a put option so these are the two type of options and what can you do with both these options so you can buy buy a put you can sell a put you can buy a call you can sell a call so you can become an options seller or an options buyer and trade in these two type of options so now comes the natural question that okay what is the difference between a call option and a put option so let me explain that very quickly so a call option is an options contract that gives the owner the right but not the obligation to buy a specified amount of an underlying security at a specified price within a specified time so this is highly highly complicated so let me simplify this for you so basically options contract is what it's a contract contract is that when you go get a rent agreement made or when you go buy a house then you are doing a contract with the builder so that's a contract everyone understands this now what is the meaning of owner so owner means the holder of the option for example if you're buying a call option then what happens you get the right but not the obligation so what is the meaning of this phrase right but not the obligation it simply means that hey if you want you can execute that deal if you don't want you don't execute that deal again going back to that in example when you paid one lakh rupee to the Builder as token money you can simply forfeit that token money that is an option for you to Forfeit it and not buy the house so you don't need to execute that contract by buying that house at 1 CR rupe you can choose to Forfeit that one lakh rupee which is the token amount and be done with the deal so that is the meaning of write but not the obligation now all these different things specified amount underlying security specified price specified time I will explain later but I hope so far the story is clear so if in one single sentence if I have to summarize the utility of buying a call option which in simple terms means that if you hold the call option you are an option buyer and you are buying what type of an option you are buying a call option then what is it that you get to do you get to purchase a security when it moves up at a predefined price so this is slightly complicated so I will explain that with an example but for the time being just simply remember that a call option gives the holder the right but not the obligation to buy something so this is the one key sentence that you you need to remember now how is it different from a put option now put option means this that the put option gives holder of the option the right but not the obligation again the same thing to sell a specified amount of an underlying security at a specified price and all this stuff right so these are highly complicated definition but if there is one one sentence that you need to remember this is what you need to remember and write it down that if you are buying a call option then you get the right to buy from someone or the option seller and if you are buying a put option then what is the right that you are getting that you are getting the right to sell to whom to the option seller so this is the primary difference between a call option and a put option so now let me show you through an example that what an option looks like so basically if you go to fno stocks then you can do options trading there you can do it on indexes also for example nifty50 or Bank Nifty are very tradable liquid options so what I've done is that I've gone to zeroa and what am I trying to buy so I'm trying to buy Nifty option what type of an option CE means call option so I'm trying to buy a Nifty call option now there are a few key things associated with this option so let me quickly explain it to you so this 14,900 is called as the strike price this 50 quantity is called as lot so 50 is the minimum amount that you will need to buy you can't go any lower than that and for that reason you have to put in a margin of 1 39,600 rupees in order to buy a call option for Nifty which has a strike price of 14,900 so what exactly is a a strike price let me explain that very quickly so there are three key terms that you need to understand so the first is what is the strike price second is that what is the premium and what is the expiry so let me take a minute to explain all these three things strike price is the contract price this is the price point at which we have agreed to trade on this option for example remember that housing example what was the strike price the strike price was 1 CR rupe because that is the deal that you have finalized with the builder that hey I'm going to buy this house from you at 1 rupe and here is the token amount that I'm giving you of 1 lakh rupee so I hope this is clear that what strike price is second key point is the premium the premium means the insurance that you're buying so you can see that this is the insurance price of 2792 this is called as premium so now you are a call buyer here not a call seller if you are buying the call what do you get you get the right but not the obligation but on the flip side someone is selling you this call why would they sell you this call they will have no right but just the obligation they are doing it for insurance money this is very similar story to insurance company that when you go and take insurance company the insurance company on a 10 lakh rupee car might be charging you 10 15,000 Insurance how are they able to survive in the market because they are insuring so many cars so they are collecting premiums similarly the option seller make money by selling this premium or the insurance and option buyers are the ones who are paying this premium now comes the third part which is expiry there is weekly expiry and there is monthly expiry so weekly expiry happens on Thursdays and monthly expiry happens on the last Thursday of the month in case it's a holiday on the last Thursday of the month then it happens on Wednesday now let me finally tell you that how you would be making money by buying this call option so right now at the time of shooting this video Nifty is trading at roughly 17,6 rupees now if you aggregate the strike price and premium what is the amount that you get so if you add 14,900 and 2792 what is the price that you are getting you are getting roughly 14692 so this becomes a number for you to beat how exactly let me explain this so in this particular example you are a call option buyer and call options buyer make money when the markets go up so let's say that nifty50 before the August expiry it goes to 20,000 right so if you are an options buyer you will make money when the markets go up and the market has gone to 20,000 this is the premium that you have already paid so this is gone already right and this is the strike that you have purchased so if you aggregate this and you subtract it from this this is the amount of money that you will be making now there are multiple scenarios that can play out for example you can buy a call you can sell a call you can buy a put you can sell a put and now on top of that there are different premiums and expiries Associated as well for example here is an entire snippet of Asian paints call and put options and you can buy different expiries at different premiums now of course through one single video I'll not be able to cover all the ground but I hope this basic video gave you an understanding of what exactly is an option how is it different from a Futures when you can make money for what purposes you should be using you should not be using it what I would suggest is that if this type of stuff interests you learn more about it but please do not jump into speculation of options that is very very important use options for hedging now I might do an advanced video I might not do an advanced video depending on the response of the video so please use options for hedging please don't use options for speculation in fact some of the best investors in the world what they do is that they buy and take a lot of cash positions which is buying stocks outright and then they hedge their portfolio by trading in options I know that this was a slightly complicated topic to cover but this is the simplest way I could have taught I hope you enjoyed learning and I will see you soon