Say, you are going to purchase a new truck. Now you can and definitely will hedge the risk for truck by going for a car insurance. Options provide an individual with a hedging mechanism through option instruments.
For E.g. Consider Sale and Purchase of Rice
- A simple futures contract says that I will agree to buy rice from you in one year's time, at a price that we agree right now.
- An example of an option is a contract where we agree that I can buy rice from you at any time over the next year, at a price that we agree right now - but I don't have to if I don't want to.
People lose money in options as they start gambling in market instead of using options as a tool to manage risk. They will speculate say buying a call option with a hope that stock will move higher and at the end lose money to more experienced traders. So remember it is for hedging and not for speculation.
You can check out F&O Basics which have been explained in great detail here and if you want to trade in Future and option segment than none can beat the F&O Tips which we generally close intraday only considering the global uncertainities.