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 Financial Basics |
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Stock markets by their very nature are fickle. While fortunes can be made in a jiffy more often than not the scenario is the reverse. Investing in stocks has two sides to it –a) Unlimited profit potential from any upside (remember Infosys, HFCL etc) or b) a downside which could make you a pauper.
Derivative products are structured precisely for this reason -- to curtail the risk exposure of an investor. Index futures and stock options are instruments that enable you to hedge your portfolio or open positions in the market. Option contracts allow you to run your profits while restricting your downside risk.
Apart from risk containment, options can be used for speculation and investors can create a wide range of potential profit scenarios.
We have seen in the Derivatives School how index futures can be used to protect oneself from volatility or market risk. Here we will try and understand some basic concepts of options.
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