Futures and options are both derivatives, meaning that they derive their value from underlying assets. In simple terms, futures are derivative financial contracts that make it obligatory for the parties involved to transact an asset at a predetermined price on a predetermined future date. Options, on the other hand, do not come with any such obligation. Instead, they give the buyer of the option the choice to transact an asset at a predetermined price on a predetermined future date.
Many beginners to FnO trading often look for a futures trading strategy or an options trading strategy to help them earn good returns on each trade. If you are new to the market derivative segment, here are three ways in which you can improve your strategy and make futures trading and options trading more profitable.
Don’t lose track of the key elements of the trade
Before you enter into a trade, make sure you get the structure right. More specifically, you need to keep the strike price, the premium and the expiry in mind. Ensure that the premium you’re paying is within your budget, and is generally not way above the likely profits that the trade may bring in. The expiry is important too. Near-month expiry may be more expensive, while far-month expiry means less liquidity. Keep this in mind, so you can strike the right balance.
Use FnO trading as a hedging mechanism
Options trading and futures trading offer a lot of leverage.This is one of the key reasons many traders gravitate towards FnO trading. You can make use of the FnO market as a hedging mechanism too. For instance, if you hold equity stocks of a particular company, you can hedge your position by purchasing at-the-money put options. So, if the stock price rises, you need not exercise the option. If it falls, your options contract can hedge your spot market position.
Make use of profit targets and stop losses
Another excellent way to profit from FnO trading is to make use of stop losses and profit targets. Stop losses keep your losses from going below a certain point, and they can prove to be very useful if the market moves differently compared to what you expected. Profit targets, on the other hand, enable you to exit your position when you’re in the green zone. Getting too greedy and waiting to make more gains could turn out to be detrimental if the market falls.
If you need a little more help to put together an options trading strategy, Sensibull, our advanced options trading platform, can be highly useful. It is equipped with the intelligence and intuition needed to find and execute ideal option strategies. With an inbuilt strategy builder, the Sensibull platform helps you create and analyse option strategies.
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