Futures and Options are complex avenues in stock market trading that require you to develop and implement trading strategies. They are derivative products that get their value from their underlying assets.
However, if you are just starting with F&O trading, you must know the basics for successful trades. To get you started, here is a beginner’s guide to Futures and Options trading.
What are Futures and Options?
Futures and Options are products of the stock market, also called derivatives, as they “derive” their value from an underlying asset, such as stocks, bonds, commodities, etc.
They are essentially contracts that give those entering them rights to buy or sell the stock at a set time and a set price. However, depending on whether it is a Futures or Options contract, these contracts will hold obligations to perform their execution accordingly.
Futures:
- It gives the purchaser the right to buy or sell a particular underlying asset at a predetermined price and on a set date in the future.
- Those entering a Futures contract must execute their contracts on the expiration date, regardless of whether they are in their favour.
- It can be used for hedging or speculating.
Options:
- Options contracts also give the purchaser the right to buy or sell the underlying asset at a set price.
- However, they are not obligated to execute it before or on the expiration date of the contract.
- This can be used for hedging, speculation, and generating income.
What are the Benefits of Futures and Options Trading?
- Diversification
By investing in Futures and Options, you can distribute your funds across various market sectors and assets. This reduces risks and helps maximise profits.
- Speculation Opportunities
With advances in technology and gaining more skills, you can predict market movements and make the best use of speculative opportunities in any market condition.
- Leverage and Hedging
Leverage allows you to buy or sell large positions in the F&O market, which is otherwise not accessible to investors. Moreover, with F&O trading, investors can hedge against price fluctuations in the market.
Steps to Start Trading Futures and Options
- Select the Best Trading Platform
It is of utmost importance that you select the right trading platform to successfully trade in the Futures and Options markets. Carefully review features, such as real-time information availability, top security, registration under SEBI, quick entry and exit in trades, etc.
- Open Your Trading Account
Open your trading account and fill out some mandatory information, such as name, DOB, bank details, etc., along with KYC completion.
- Learn New Strategies and Start Trading
Once your account is active, you can use the platform’s analysis tools, carry out research, and start trading.
Tips for Successful Futures and Options Trading
- Utilising Stop loss
Using stop loss is one of the most beneficial strategies for minimising losses and auto-executing trades. This helps you set strict targets and practise disciplined trading.
- Using Analysis Tools
Conduct a thorough analysis of your trades and make the most of the tools and charts available on your trading platform.
- Stay Up-To-Date About Market Trends
Market trends and movements constantly change. It is crucial to stay updated about current market conditions and make accurate predictions to know when to enter and exit a trade.
Conclusion
Future and Options is a lucrative market with a high potential of earning huge profits. However, with high profits and leverage, there is also high risk involved.
Thus, before you start trading, ensure you select the right trading platform, utilise risk management tools, gain knowledge about this avenue, and trade wisely.
