Trading in derivatives is not as easy as it may seem. Even traders with a wealth of experience coming from trading in futures and options sometimes get things wrong and make mistakes. Therefore, if you’re a beginner, it is extremely important to tread cautiously. One wrong step and you could lose a major chunk of your investment capital.
As much as it is important for options traders to get to know what to do, it is equally crucial to be aware of the mistakes that they’re likely to make. In this article, that’s exactly what we’re going to be looking at.
Just because there are many F&O stocks out there doesn’t mean that all of them are perfect for trading. As a matter of fact, apart from large-cap companies, other F&O stocks can suffer from low participation, leading to low volumes and illiquidity.
This is the case with other asset classes like currencies and commodities as well. In the case of currencies, exotic currency pairs tend to have low levels of liquidity compared to popular pairs like GBP-USD and EUR-USD. The same is with commodities as well. Gold, crude oil, and natural gas are very popular, whereas most agricultural commodities are illiquid.
Here’s where many beginner options traders make a mistake. They tend to focus on trading in illiquid futures contracts or Out of The Money (OTM) options contracts primarily due to the low premium and margin requirements that they come with. While this allows them to purchase more lots or units, potentially increasing the chances of getting higher profits, there comes a heavy cost. Since these contracts are illiquid in nature, squaring off positions becomes very hard, if not impossible. And without being able to square off, they’re effectively stuck with the position and can even up with severe losses.
And so, an ideal tip for options trading for beginners is to always stick to contracts that are highly liquid in nature. This not only increases the chances of getting profits, but also makes it easy to square off the position.
In addition to the ones mentioned above, there are plenty of other mistakes that beginner futures and options traders make. Here’s a quick glimpse of a few of them.
Derivatives trading primarily works on leverage, which basically means that you can take on large positions by simply depositing a fraction of the entire trade value as margin or premium. Although leverage can help you multiply your profits through large positions, it can also magnify your losses as well.
Therefore, as beginners, it is important to ensure that you don’t take on large positions straight away. Keep in mind that it is always better to start slow and increase your position size as you go on.
This is another major mistake that new futures and options traders tend to make. As both futures and options contracts near their respective expiries, their margin requirements go down. However, just because contracts are more affordable doesn’t mean that this is the right time to take up a position.
As a matter of fact, as you come closer to the contract expiry, volatility tends to witness a huge spike. The prices of contracts are more likely to swing wildly and may even go against your expectations, causing severe losses. And so, it is always ideal to refrain from entering into new positions as you get closer to expiry.
With this, you must now be aware of some of the common mistakes that new derivative traders make. Now, whether you’re interested in trading derivatives or investing in upcoming IPOs of companies, you would need to first have an active demat account in your name.
You can open a demat account and a trading account in your name for free through a paperless process by simply visiting the website of Motilal Oswal. So, what’re you waiting for? Go ahead and open one today!
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