Step-by-Step Guide to Futures and Options Trading for Beginners

Derivatives trading in futures and options was introduced in Indian stock exchanges in 2000. At that time, futures and options were only available for indices. A couple of years later, futures and options on individual stocks followed suit. Since then, the volumes of these two products have surged fast.

Derivatives have proven to be handy tools for both investors and traders. Interestingly, with derivatives, a rise in the indices does not necessarily mean gains and falling indices do not necessarily mean losses. The art of trading in futures and options is essential if one desires to benefit from the rise and fall of the stock market.

In this article, we will cover the fundamental knowledge required for trading futures and options in India, as well as the best practices for beginners. For those starting out, it’s beneficial to simulate real trading environments or use platforms that act as a stock trainer to help you gain hands-on experience without financial risk. This allows new traders to refine their strategies before diving into live trading.

Futures & Options Trading in India

Basics

Do you want to know what is future and option trading or how to trade in futures and options? We will make sure that you get the f&o trading basics with examples right before investing. Focusing on futures and options trading for beginners, let us look at some of the basic concepts:

F&O are types of derivatives whose value comes from the underlying value of the assets. Plenty of types of underlying assets exist in which derivatives are available. It ranges from stocks and indices to commodities such as wheat, petroleum products, gold, silver, and cotton.

These futures and options serve two primary purposes: hedging against price risks and profiting from price changes and speculations. In case you are shocked to read the word speculative, the reality is that most of it is speculative. In short NSE FO means risk for investors.

While learning futures and options trading for beginners, remember that every futures and options contract needs a party and a counterparty, and every buyer of a future or options contract needs a seller or `writer’. These are some of the most basic terms relating to F&O trading in India. Clearly, NSE option trading should be approached with caution.

How to Trade in Futures?

1. Establish Risk Tolerance:

Before trading, understand your risk appetite. Determine how much loss you can afford without significantly affecting your lifestyle.

2. Define Trading Strategy:

Choose your strategy based on your research or seek professional advice. Develop a clear approach for trading futures or options.

3. Open a Trading Account:

Start with a simulated trading account for practice. Once confident, open a real account with a reputable firm like SMC Global Securities after a background check.

4. Provide Margin Money (Futures):

Deposit 5-10% margin money of the contract value. The broker holds this amount as security during the contract’s duration.

5. Placing Orders and Settlement:

Place buy or sell orders specifying contract size and expiration date. Futures contracts settle monthly, expiring on the last Thursday.

How to Trade in Options?

Understand Options Basics:

Options are contracts that give the buyer the right, but not the obligation, to buy (call) or sell (put) an asset at a predetermined price before the expiry date.

Choose Call or Put Options:

If you believe the price will rise, buy a call option. If you expect a price drop, buy a put option. You can also sell options to collect the premium if you expect limited price movement.

Open a Trading Account:

You’ll need an options-enabled trading account with a broker. Ensure the broker provides good research tools and trading platforms for options.

Set a Strategy:

Choose a strategy based on market conditions, like buying options for potential big moves or selling them for limited gains. Common strategies include covered calls, protective puts, or straddles.

Monitor and Exit:

Track your options position. You can sell the option before expiration to lock in profits or cut losses. If not, decide whether to exercise the option or let it expire.

Conclusion

Who doesn’t want to know what is future and options in share market? It is a very lucrative activity to deal in futures and options trading for beginners, but precautions must be taken to reduce the risks and maximise returns. Clearly, extensive knowledge and experience are required for trading in derivatives. A newcomer should be very cautious while entering this field.

FAQs

1. What are Futures and Options contracts?

Futures and options are financial derivatives whose value derives from an underlying financial asset, such as a stock, commodity, or index.

2. What are the Risks and Rewards of Futures and Options Trading?

Futures and options trading offer both potential rewards and risks. Futures and options allow you to control a large amount of underlying value with a relatively small investment. You could end up losing more money than your initial investment.

3. How can beginners get started with Futures and Options Trading?

The best way to start futures and options trading is to start small. Most importantly, sell the expertise of professionals before risking your money.

4. What are the Key Benefits of Futures and Options Trading?

One of the most important benefits of futures and options trading is hedging. Hedging can be used to protect against market risks and hedge currently held positions.

5. What are the basics of future and options trading?

An options contract gives the investor the opportunity, but not the obligation, to buy or sell the assets at a specific price on a specific date known as the expiry date. A future is a contract to buy or sell an underlying stock or other assets at a predetermined price on a specific date.

References:
https://www.nerdwallet.com/article/investing/how-to-trade-options
https://www.swastika.co.in/blog/a-beginners-guide-to-futures-and-options-trading
https://www.angelone.in/knowledge-center/futures-and-options/how-to-invest-in-futures-and-options
https://groww.in/blog/how-to-trade-in-futures-and-options

Author: All Content is verified by SMC Global Securities.