Home/Blogs/5 F&O techniques that can assist traders

5 F&O techniques that can assist traders

05 Jan 2023

The rise and fall of the stock market is unavoidable when investing in it. Each market phase is distinct and requires the application of the appropriate technique and mentality to prevent losses or maximise gains, as the case may be. Most investors succumb to wishful thinking and attempt a protracted period of correction and stagnation, resulting in negative portfolio values. Earnings are seldom linear and are generally erratic, contrary to investor expectations.

Most equity investors primarily invest on the buy side and do not have a strategy in place to safeguard their portfolio from future market volatility, resulting in subpar results. However, because a large portion of stock price movement occurs in just a few future trading sessions, an investor should keep this in mind and conduct some basic research. The key is to be a patient investor since stocks always grow in the long run if money is invested in excellent firms with sound fundamentals.

5 Futures And Options Techniques That Traders Might Use To Maximise Volatility

1. Initiate stock futures short positions: Selling futures presents an opportunity in a bear market since many weak equities fall fast. It is usually best to ride the trend until it doubles. Trading short should be preferred over establishing a long position in a bad market trend.

  • Using a top-down technique, one might identify weak sectors and equities to launch short-selling ideas to earn market alpha. Stock-specific bearish call and put options may also assist in capitalising on the opportunity during a market correction.
  • Some technical indications for identifying short stocks include a moving average with crossover and a trend line breakdown. Another derived indication for detecting short stocks is the aggregate of open interest (short build and long draw), more call option writing, and stocks with a lower call ratio.

2. Safeguard the wallet: Coverage is an essential component of any rocky market ride. After knowing the portfolio's composition, a portfolio may be hedged by purchasing a Skilled Put or Bear Put Spread, that is, utilising monthly contracts or long-term options. The hedging strategy would be determined by the kind of stock in the portfolio and its beta. Compared to small and mid-cap companies, it's easier to get to beta and design your hedging strategy in a portfolio containing a large-cap Nifty company. For a portfolio of mid-cap companies, you must decide on the appropriate hedging instrument (Nifty or stocks), the appropriate strike and spread size, and, finally, position monitoring and exit. It should be remembered that hedging or risk mitigation does not come cheaply, and various underlying have varied betas. Although 100% hedging is not always possible, partial hedging might assist protect the current position.

3. Increase profits through call writing: Call writing is the most popular and well-known approach for lowering the cost of maintaining positions and generating extra returns on current holdings.

  • To do so, investors must choose equities for Option/Put writing based on the stock's unique liquidity and have a safety cushion in place when writing strikes. The cushion and the performance of the adequate premium may be used to determine the exercise price. Traders must monitor the position by putting alerts in the system to assist them in determining whether to quit or follow.
  • The call writes just provide an input stream as a bonus, and any more actions beyond the writer's strike may not assist in achieving any actual desired performance. It is better suited to participants seeking continuous cost savings and a predetermined amount of profit

4. Long and short positions: Pair trading offers an additional benefit in such market circumstances since many pairs are strongly connected and provide chances when they vary from their mean. Pairs trading has a minimal risk since both equities have long and short market exposure.

5. Option spreads: When market sentiment is pessimistic, volatility stays high, as does the option premium, as does market risk. Even if the option premium is substantial, writing options in greater implied volatility (IV) circumstances is not advised. It is preferable to use the Butterfly, and Iron Condor techniques rather than just selling out-of-the-money (OTM) calls and puts. To reduce risk, the sale or purchase of a futures contract should be hedged using protective put and call options. This practice will aid in avoiding panic regarding margin calls. Traders are advised to exit most intraday naked bets and avoid using excessive leverage until the India VIX (volatility) returns to normal levels. A long-term investment is guided by fundamental analysis. Similarly, technical analysis is a profitable tool for traders in an ever-changing market.

Who Are The Derivatives Market Participants?

The futures and options market is divided into three sorts of players. Let's take a short look at each one.

  • The first kind of hedger is those that use the derivatives market to protect and decrease risk. Hedging is the act of attempting to safeguard a position or expected position in the spot market. Hedging is only done when an underlying position exists. It is done by employing an opposite location in derivatives. For example, if you hold a purchase position, you must have a sell position in derivatives and vice versa.
  • Speculators are sometimes known as traders or punters. They are beneficial because they provide depth and breadth to the marketplace. Speculators have no risk to hedge. Instead, they take on a high amount of risk in the hope of making a profit.
  • Arbitrageurs play an essential role in the institutional derivatives market. Arbitrage earnings are risk-free. Some traders enter the market to make risk-free earnings. They do this by simultaneously purchasing and selling financial assets such as stock futures in several marketplaces. For example, one may always sell a stock on the NSE and purchase it back on the BSE simultaneously. But these arbitrage possibilities have practically evaporated. The most common is cash-futures arbitrage, which is based on the difference between spot and futures prices.

Wrapping Up

Futures and options are about more than simply trading and hedging; they are also about basic and hybrid strategies. Futures and options techniques are important to derivatives, and there are several F&O trading strategies that may be used safely and successfully.


Related Articles: Can the commodity markets provide cues for equity trading | Beginners Guide to Agri Commodity Trading | 5 Successful Commodity Trading Strategies | Role of Commodity Markets In India 


Checkout more Blogs

You may also like…

Get Exclusive Updates

Be the first to read our new blogs

Intelligent investment insights delivered to your inbox, for Free, daily!

Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities