The stock market lets you trade in multiple ways. There are different variables available for this. Besides the regular Equities and Debt instruments, some Derivatives provide lucrative returns. Futures and Options are two such Derivatives in the stock exchange. They are financial instruments that derive value from the price moments of other tools. The National Stock Exchange pushes them into the market.
They are contracts more than assets. You need not hold onto them but sell them in a specified period to make profits. Under Futures, buyers and sellers have unlimited potential for profit or loss. However, you face limited risks as a buyer when you trade in Options. Nonetheless, both can potentially provide quick returns. Here are some tips for Futures and Options Trading:
Understand the concept of margin when you trade in F&O. Margin is what you pay the broker for trading. It is generally the percentage of transactions you make. The brokers fix it at the maximum possible loss that may occur. The margin is higher during volatile times and vice versa. In Futures, you pay it to the broker; in Options, you pay a premium to the seller or writer of the Options.
You also need to consider the leverage aspect. While the margin is a percentage of the underlying asset, leverage is the volume of transactions you make. Higher leverage means you can make a larger number of transactions. This increases your chances of making profits. However, the downside is losses if you get the timing wrong. Hence, understanding this is the best tip.
Know the expiry date
F&O contracts are not for an unlimited period. As mentioned, they are contracts usually lasting for two to three months. At the end of this duration, you need to settle the contracts. You can do so in cash or by delivering the shares. Also, you need not hold them until the expiry period. You can scare off the deal earlier if you feel that prices are not moving in your favour.
Evaluate the pros and cons
When you decide to do F&O Trading, you should also know what they include. Like advantages, there are certain limitations involved. For instance, high leverage lets you trade in significant positions, but the losses are also massive if the market misbehaves. Trading in these Derivatives is all about betting on future price movements. Understand such pros and cons for trading successfully.
Planning your trades carefully before establishing a position is crucial. This relates to a profit objective and an exit plan when things go against you. You need to minimise the possibilities when making rash decisions when the market is at risk. You should pull back at the right time and retain your profits.
Also, you need not open a Demat Account for such trading. A Brokerage Account is where all the transactions happen.