In the share market, where there are immense risks related to fluctuations in prices, Derivatives act as an important financial tool to counter these risks and enable investors to generate desirable outcomes. The desirability can vary from hedging and speculation to arbitrage. The derivative contract derives its value from the underlying assets.
Futures and Options Trading is when people buy and sell contracts to predict and protect against future price changes of an asset, such as currencies, stocks, indices, or commodities. These contracts give the right to buy or sell the asset at a specific price and date in the future. Trading in this market requires you to have some knowledge and experience. The advantages are:
Risk management
F&O Trading lets traders safeguard themselves from market fluctuations by using a hedging strategy. It enables traders to reduce the risk of losing money due to unexpected price changes in the underlying assets. When buying Futures contract, you can fix the asset price and protect yourself from future hikes.
Options contracts allow the holder to buy or sell an underlying asset at a specific price and date in the future without obligations.
Leverage
It enables traders to make big trades and earn handsome profits with little money. It is the ability to control a large amount of an asset using a small amount of money by borrowing from a broker or another lender to make the trade bigger.
Volatility
When buying an Options contract, the buyer has the choice but not the obligation to buy or sell the underlying asset at a specific price and date in the future. You can predict the market. If you think that the price of an underlying asset will go up, buy a Call Option. Conversely, you buy Put Options when you are concerned that the stock market will fall.
With a Demat Account opening, you can take your Derivatives Trading to the next level. Fund houses offer online tools and resources to help traders access all the market updates and other features from anywhere.
Diversification
Futures and Options Trading can help traders spread their investments across different markets or sectors, which is called diversification. It is a way to manage risk by not putting all the investments in one place. Futures and Options contracts can be used to invest in commodities, currencies, and stocks, allowing you to diversify your investments across varied sectors.
Options contracts allow traders to diversify their portfolios by letting them speculate on the market’s direction without actually selling or buying the underlying asset. You gain exposure to a market or sector without investing excess capital. To start trading, open a Trading Account online with a SEBI-registered broker.
Final words
Futures and Options are traded on Indian stock exchanges like the BSE and NSE. Opening a Demat and Trading Account is necessary for this.
