Understanding Derivatives Trading with Azee Securities and PSX

In the dynamic world of capital markets, derivatives are critical tools that help investors hedge risks, speculate on price movements, and improve portfolio performance. Among these derivatives, Futures and Options are the most commonly traded instruments.

If you're trading in Pakistan Stock Exchange (PSX) or considering it through a trusted broker like Azee Securities, understanding the key distinctions between Futures and Options is essential.

What are Derivatives?

Derivatives are financial contracts whose value is derived from an underlying asset. This asset can be a stock, commodity, currency, or even a market index. Instead of owning the asset directly, a derivative allows you to speculate on its future price.

In the PSX context, derivatives mainly come in the form of Futures Contracts, while Options trading is yet to be launched. However, as part of foundational investment knowledge, it's important to understand both Futures and Options for when broader products become available.

What is a Futures Contract?

A Futures Contract is an agreement between two parties to buy or sell a specific quantity of an asset (like shares) at a predetermined price on a future date. Futures are binding on both the buyer and the seller.

For example, if you expect the price of a company’s stock to rise, you can enter a futures contract to buy that stock at today’s price, with the hope of selling it at a higher price when the contract expires.

Futures contracts are widely used in PSX for index-based trading and stock-specific strategies. At Azee Securities, investors can access these contracts through our easy-to-use trading platform, guided by experts.

Key Features of Futures:

• Obligation to fulfill: Both parties must carry out the contract terms.
• Margin required: Investors need to deposit an upfront margin.
• High risk–high reward: Profit and loss potential are unlimited.
• Favored by speculators and arbitrageurs.

What is an Options Contract?

An Options Contract gives the buyer the right but not the obligation to buy or sell the underlying asset at a specific price within a certain timeframe. The seller (or writer) of the option, however, is obligated to fulfill the contract if the buyer decides to exercise the option.

There are two main types of Options:

• Call Option – Gives the buyer the right to buy an asset.
• Put Option – Gives the buyer the right to sell an asset.

For example, if you believe the price of a stock will rise, you can buy a Call Option. If the price does go up, you can exercise your option to buy the stock at the lower price and sell it at the market price for a profit.

Although Options trading is not yet available on PSX, understanding it prepares investors for future market developments and global investing.

Key Features of Options:

• Right, not obligation for buyers.
• Premium paid upfront by buyers.
• Limited loss for buyers (only the premium is at risk).
• Unlimited profit potential.
• Used widely for hedging against market volatility.

Key Differences Between Futures and Options:

Real-World Use Case: Futures Trading on PSX

Let’s say you believe OGDC, a major listed company on PSX, will increase in value in the coming month due to strong oil prices. However, you don’t want to invest the full amount upfront. You can enter a Futures contract through Azee Securities to buy OGDC shares at today's price and settle later.

If your prediction is correct and OGDC rises, your profit will be the price difference. However, if the price drops, you must still fulfill your contract, which exposes you to losses.

Why Futures & Options Matter for Investors:

• Hedging: Manage portfolio risks due to market volatility.
• Speculation: Leverage small capital for high returns.
• Arbitrage: Profit from price differences in markets.
• Flexibility: Choose between obligation (futures) or optionality (options).

At Azee Securities, we help investors understand and navigate these products safely and effectively through PSX.

Risks Involved:

While the potential for profit is high, so are the risks. Futures can magnify losses, and improper use of leverage can wipe out capital quickly. That’s why it's crucial to:

• Start small and learn.
• Always use stop-loss limits.
• Follow market trends and expert guidance.
• Diversify your portfolio to manage exposure.

Quick Recap

• Futures contracts are binding agreements where both buyer and seller must fulfill the deal at a set future price.
• Options contracts offer the buyer flexibility to choose whether to execute the trade, while the seller must comply if exercised.
• In futures, risk and reward are both unlimited. In options, the buyer’s loss is limited to the premium paid.
• Futures are available on PSX, including index futures and stock futures. Options are not yet available, but worth understanding for future developments.
• Futures are favored by speculators and arbitrageurs, while options are often used by hedgers and cautious investors.

Get Started with Azee Securities

Ready to start your investment journey with Azee Securities? Open a Stock Trading Account and gain access to the Pakistan Stock Exchange (PSX). Let Azee Securities help you make informed decisions. Our expert advisors, advanced trading platform, and real-time market data ensure you stay ahead of the curve.

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