Trading in options and futures holds great promise for aspiring derivative traders. More often than not, people venture into FnO trading without getting the information necessary to understand how trades in this market segment differ from trades in the spot market. If you’ve been eyeing futures trading and options trading opportunities, then here 5 things you must know before you venture into the derivative markets.
1. Your losses are not limited to the margin money
In spot market trades, the risk is generally limited to the amount of capital you put in. However, in futures trading and options trading, you pay margins that are much less than the actual capital you’re risking. This makes it easier to lose sight of the true magnitude of your potential loss. Before entering into FnO trading, it helps if you keep this in mind.
2. It’s easy to overlook liquidity
Many traders who are new to options trading and futures trading often overlook the importance of liquidity. So, ensure that you don’t commit the same mistake. While it’s important to look at a good options trading strategy or a futures trading strategy, it’s just as necessary to ensure that the derivatives you’re trading in are liquid enough to support an exit.
3. Moneyness of the option is important
This is something that you need to know specifically before you get into options trading. OTM or out-of-the-money options may be more affordable, but they come with a major downside - they’re often nott liquid enough. So, a low-priced option is not necessarily the best opportunity. Make sure that you balance affordability with profitability and liquidity smartly.
4. You can use FnO trading as a hedging mechanism
FnO trading comes with its own set of risks. This is why it’s always a good idea for beginners to execute a future trading strategy or an options trading strategy in combination with a regular trade, so the FnO trade can be a hedge for the latter. This way, you can minimize the risk while simultaneously getting a better idea of how the derivative market works.
5. Trading strategies matter
FnO trading strategies play a key role in derivatives trading. There are different strategies for different scenarios. For instance, if you’re worried about the cost of holding, you can make use of covered calls. Alternatively, if you wish to improve profits on the downside, you can make use of protective puts. Also, it helps to keep in mind that complex and multi-layered strategies are, in general, more expensive.
So, before you venture into FnO trading, make sure you keep these points in mind. For beginners, it helps to have a reliable tool or platform to depend on, particularly with regard to strategy building and analysis. This is where Sensibull, our advanced options trading platform, can prove to be handy. Check it out and make use of the beneficial features if you’re looking to venture into the derivative segment.
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