The derivates market is extremely volatile and there is a risk that you might lose much more than your initial capital.
The share market offers a plethora of investment opportunities, and futures and options (F&O) is one such popular avenue for traders. If you trade in equity or are interested in the share market, you might have heard of it before. Futures and options are derivative instruments that allow investors to speculate on the price movements of underlying assets without owning them.
What exactly is Futures and Options trading?
F&Os are financial contracts that derive their value from an underlying asset such as stocks, indices, currency, or commodities. A futures contract represents an agreement to buy or sell the underlying asset at a predetermined price and date in the future, while an options contract means that the buyer has the right to buy or sell the asset at a specified price within a particular time frame but is not obliged to do so.
F&Os differ from equity as they are derivatives. In contrast to derivatives, investing in equity means ownership in a company, represented by shares of stocks. Equity holders have a claim on the company’s assets and profits and may exercise voting rights on corporate decisions. Derivatives do not provide ownership and are primarily used for speculation, hedging, and managing financial risks.
Steps to trade in Futures and Options
1. First and foremost, it is essential to have a thorough understanding of the share market, including the underlying assets and their dynamics. Additionally, familiarise yourself with the various F&O terminologies, such as spot price, lot size, strike price, and expiry date.
2. In order to trade in futures and options, you need to open a trading account with a registered stockbroker.
3. With the use of technical tools, thoroughly analyse the underlying asset you want to trade. Consider factors like company financials, market trends, and news.
4. Decide whether you want to trade call options (bullish view) or put options (bearish view).
5. Once you have selected the asset, determine whether you want to take a long (buy) or short (sell) position. Place the order with your stockbroker, specifying the contract details, quantity, and expiry date.
6. Lastly, keep monitoring the share and your positions. Implement various appropriate risk management strategies in order to manage risk and lock-in gains.
Double the rewards, double the risks
The derivates market is extremely volatile and there is a risk that you might lose much more than your initial capital. Before diving into futures and options trading, it is crucial to develop a solid risk management strategy. This involves setting your risk tolerance, establishing stop-loss orders, and defining your trading capital. F&O trading can be volatile and carries inherent risks, so it is vital to trade with a disciplined approach and avoid overexposing yourself to excessive risk.
And there’s more…
Technical analysis plays a crucial role in F&O trading as it involves analysing price charts, trends, and indicators, and traders can make informed decisions about exit and entry points. Understanding support and resistance levels, moving averages, and chart patterns can provide valuable insights into the future price movements of underlying assets.
Considering F&O trading is a bit more complex than equity trading, being well-versed with the share market and doing your research will be greatly beneficial. Learning how to manage risks while trading in derivatives will help you curb your losses.
Moneycontrol Journalists are not involved in creation of this article.
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