Futures and Options Homework Help

Futures and Options

Options are different from futures in several respects. At a practical level, the option buyer pays of the option in full at the time it is purchased. After this, he only has an upside. There is possibility of the options position generating any further loss to him (other than the funds already paid for the option). In contrast, futures are free to enter into but can generate very large losses. This characteristic makes options attractive to many occasional market participants who cannot in the time to closely monitor their futures positions.

Buying put options is buying insurance. To buy a put option on the Nifty is to buy insurance that reimburses the full extent to which the Nifty drops below the strike price of the put ope This is attractive to many people and to mutual funds creating guaranteed return products. Nifty index fund industry will find it very useful to make a bundle of a Nifty index fund and Nifty put option to create a new kind of Nifty index fund, which gives the investor against extreme drops in the Nifty. Selling points options is selling insurance. Anyone who feels earning revenues by selling insurance can set himself up to do so on the index options market.

More generally, options offer non linear payoffs, whereas futures only have linear pay by combining futures and options, a wide variety of innovative and useful payoff structures can created.

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