A futures contract is an agreement to buy or sell a stock share at a specified rate on a certain day. On the other hand, an options contract grants the investor the right—but not the responsibility of purchasing or selling assets at a fixed price on a particular date known as the expiration date. You must first have an open trading account to buy and sell assets in the financial markets.
To begin F&O trading, you will need an open trading account, also known as a derivative trading account, and you’re free to trade in F&O from anywhere. It should be mentioned that futures are only available on a subset of stocks.
An open trading account is not required if you do not intend to trade shares or other assets. But since you are trading in future options, a trading account is a must. Futures & options trading is a stock market trading contract used by shareholders. They offer the potential for huge profits as commercial transactions between the buyer and seller of an asset.
In this article, we’ve listed five things that you must know before F&O trading. Let’s get started!
1> Don’t be taken in by the power and influence
Futures and options are highly leveraged investments, with futures being much more challenging to sell than options. You are more inclined to hear about the future profit you may earn by negotiating a lower price. It’s less common to hear that margins may operate both ways. You may be compelled to sell for less or acquire more than the market price.
Your possibilities of making a profit are ideally the same as your chances of making a loss. While options may appear to be the safer bet, as previously discussed, you are more likely to put off trades and lose the high value, resulting in a net loss.
2> Maintaining your risk tolerance
Your risk tolerance can be defined as the level of risk you are willing to undertake to accomplish your goals. The underlying motivation for trading derivatives is to reduce risk by fixing the price beforehand. In practice, a trader must always try to find a price to generate healthy profits. However, one of the financial maxims also applies here: the higher the profit, the higher the risk. In simple words, think about how much danger you’re prepared to take while complying at any cost.
3> Increasing returns via call writing
The best strategy for reducing holding costs and increasing the return on an existing stock is writing.
To accomplish this, investors must select stocks for F&O trading for writing based on stock-specific cash flow while maintaining a safety margin while writing strikes. A buffer and a sufficient premium yield can determine the strike price. To determine whether to track the position or leave it, traders must keep an eye on the position by establishing alerts in the system.
Call writing only provides some flow of money as a premium, but any larger spike in stock beyond the writing strike may not actually create a preferable real return.
4> Trading in long and short
Pair trading offers an extra benefit in these market conditions since many pairings, like HDFC Bank and HDFC, are closely connected and offer the opportunity when they deviate from their average. Pair trading has a low risk because both stocks have Long and Short visibility in the supply chain. If you possess stock in a firm and anticipate it to grow in value, you have a long position in the market. However, if you are pessimistic on their future and sell them before they have been transferred into your name, you have a short position.
5> Consider the costs
Derivative trading does not involve the use of a Demat account. It is generally seen as a less expensive option. However, don’t be deceived by the cheaper stock broker. The underlying cost rise, however, is attributable to the increasing trading frequency. Derivative trading is rapid, with transactions occurring in a short amount of time, which increases the aggregate cost of your trade. Consequently, it is always smart to balance the volume of transactions with the earnings.
Understanding the concepts and prices is extremely beneficial in F&O trading. You must conduct research before starting an open trading account!
Futures & options trading is perfect for trading with a short time horizon and a high-risk tolerance. Furthermore, many experts recommend that a beginner begins with the equity cash trading segment before relocating to the futures and options segment.
However, trading in derivatives is not everyone’s cup of tea if you don’t use the right broker and have access to research and advice. Once you fully comprehend these complexities, you are ready to hop into the world of F&O trading.