Hello readers, we are happy
to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A
For Stock Market Newbies”, to spread the basic stock market knowledge to
the beginners.
This
is your go-to resource for demystifying the stock market from the scratch. Each
day, we will present 10 carefully curated questions with answers that will
cover essential concepts, strategies, and terminologies. Whether you have just
entered into the market, or trying to starting your stock market journey, or
looking to strengthen your foundation, our weekly post will guide you through
the basics and beyond, making investing accessible and understandable for
everyone. Happy reading.
Day 25: Basic Stock Market Concepts
Fundamentals of Futures and Options
Trading:
1. What is a Short Position in Futures?
A short position in futures is when a trader sells a futures contract
expecting the price of the underlying asset to decline. The goal is to buy back
the contract at a lower price to profit from the price difference.
2. What is the ‘Long’ Position in Futures?
A long position in futures is when a trader buys a futures contract with
the expectation that the price of the underlying asset will increase. The
trader profits if the asset's price rises before the contract is sold or
expires.
3. How does Margin Work in Options Trading?
In options trading, margin refers to the amount of capital a trader must
have in their account to sell (write) options. For buyers of options, margin
isn't typically required, but for sellers, it acts as collateral in case the
market moves against their position.
4. What are Mini Futures Contracts?
Mini futures contracts are smaller versions of standard futures
contracts. They allow retail traders to gain exposure to futures markets
without the larger financial commitment required for full-sized contracts.
These contracts are often used for trading indices or commodities.
5. What is a Long
Straddle in Options Trading?
A Long Straddle is an options
strategy where a trader buys both a call option and a put option with the same
strike price and expiration date. This strategy is used when the trader expects
significant price movement but is unsure of the direction. Profit is made if
the asset price moves significantly either up or down.
6. What is a Short
Strangle Strategy?
A Short Strangle involves selling
an out-of-the-money call option and an out-of-the-money put option with the
same expiration date. This strategy benefits from low volatility, as it profits
if the price of the underlying asset remains within the range of the strike
prices of the options sold.
7. What is Delta
Neutral Strategy?
A Delta Neutral Strategy is used
to hedge against small price movements in the underlying asset by offsetting
positive and negative delta positions. The goal is to make the overall position
insensitive to minor price changes, making it particularly useful in volatile
markets.
8. What is a
Covered Call Strategy?
A Covered Call involves holding a
long position in a stock while simultaneously selling (writing) a call option
on that same stock. This strategy generates income through the premium received
from selling the call option but limits potential upside if the stock price
rises above the strike price.
9. What is Contango
in Futures Markets?
Contango occurs in futures
markets when the futures price of a commodity is higher than the expected spot
price. This is typically due to costs such as storage and insurance, making
distant futures contracts more expensive than current ones. Traders use
contango to gauge market expectations about future price increases.
10. What is
Backwardation in Futures Markets?
Backwardation is the
opposite of contango and occurs when the futures price is lower than the
expected spot price of the asset. This happens when demand for the immediate
delivery of the asset exceeds demand for future delivery, often signalling
supply shortages or strong current demand.
If you have any
other questions in your mind relating to stock market basics or need any
clarification, please put your query into the comment box, We will try our best
to clarify the same
Disclaimer:
The information provided on MoneyWiseMind is for educational and informational
purposes only. It is not intended to be financial advice, and you should not
rely on it as such. Before making any financial decisions, you should consult a
licensed financial advisor.
