The Futures & Options (F&O) market is one of the most profitable markets in the world of stocks. But still, it is a bit difficult to understand most traders. The F&O market hasn’t reached its potential till now. In the financial year 2020-21, the daily average volume of the F&O market in India was approximately INR 170 Crores with a value of INR 62,000 Crores.
With such a huge volume, this market is still out of the reach of everyday middle-income investors and traders. Now, let’s look at what precisely the F&O market is and how to make profits in this market. Let’s find out the depth of Options and Futures markets!
What are Options and Futures?
The exchange market offers two separate derivatives: options and futures.
An investor with an options contract has the right, but not the obligation, to buy or sell stock at a specific price. If the contract is enforceable, this transaction may take place at any time. Futures & Options trading is like a bet made on the cost of any asset or share.
Numerous businesses provide this instrument on the National Stock Exchange (NSE) market.
In contrast, in a futures contract, unless the shareholder’s position is closed before the expiry date, the buyer must buy the shares (and the seller must sell shares) on a specific date in the future.
Categories of Options
The options are further categorized into the following two types:
- Call Options: The holder of the call options has the right but not the obligation to buy a share at a specified price. This is one component of the options in future option trading.
- Put Options: These are the opposite of call options. Put options are utilized to sell equities. Put options provide traders with the right, but not the obligation, to sell the share at a specified price. This is another component of options in future option trading.
Future Option Trading for Beginners:
- Futures are leveraged products that function in both directions. The seller did not warn you that it also applies to losses, Further, the losses can be magnified when you trade futures. As long as you know that leverage through margins affects both in cases of profits and losses, it is acceptable.
- If you are an option holder, then your risk gets limited. Because your risk is constrained to the premium you pay, buying options are popular among small F&O traders.
- Options differ in that they are asymmetrical. For example, the trade is balanced for both sides if “A” buys RIL futures for Rs. 940 and “B” sells these futures. If the price reaches 960, A will benefit by 20 rupees, and B will lose 20. The opposite will be accurate if the stock price falls to Rs. 920. However, the buyer’s loss is capped at the premium regarding options. Still, the seller’s loss can be limitless.
- At varying times, futures’ margins may increase significantly. Many think that futures have an advantage over cash market purchases since margin purchases allow for leverage. But during volatile times, these margins may sharply increase.
- Always trade Futures & Options with profit targets and stop losses in place. For all leveraged positions, this is true. Your primary emphasis when trading options and futures is that of a trader, not an investor. Your focus should therefore be on safeguarding your capital.
5 Best tips to get better at Options and Futures Trading
- Diversify your Portfolio – It’s important to diversify your portfolio as a options and futures trader. You can do so by including assets that complement one another. This ensures that one asset compensates for the loss of another asset.
- Study your assets – Make sure you fully understand them before selecting them. Examine the past price fluctuations for these assets. Learn about the common reasons for these rises and falls. Most importantly, determine how your selected assets will interact with one another.
- Stick to your strategy – Create a clear future option trading plan and follow it! Your specific investment goals, risk tolerance for pretty unstable assets, time & tax considerations, etc., should all be considered while developing your trading strategy. Don’t change your approach once it has been created. You heard that right: Try again if the first time is not the charm!
- Stay Focused, Updated and Informed – To be successful in futures trading, traders must give their holdings their full attention. The numerous futures trading marketplaces are continually evolving and changing. Futures traders must keep informed when these changes take place. New information emerges, and new tactics are being devised as conditions change. Remain updated and keep your plan current to reflect current market trends & analytics for the most outstanding results.
- Use your resources – Futures trading is one of several topics on which you can find a plethora of information in the digital age. Futures trading demands that its players thoroughly understand the present market and their assets and keep up with it.
Contrary to popular belief, trading futures and options are not as complex as it may seem. Again, though, trading futures, futures & options, and retail off-exchange foreign currency transactions entail a high risk of loss and are not recommended for all investors. You’ll use these cutting-edge financial products better if you properly understand them.
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