The value of futures and options is derived from an underlying, which might be an index, stock, bond, or commodity. Now, let us concentrate on futures and options on equities and indexes. The value of a future or option is derived from a stock. The value of an index future or option is derived from an underlying index such as the Bank NIFTY. Futures and options volumes in India have increased dramatically in recent years, accounting for 90% of total market volumes.
F&O has its own set of myths and follies. For example, most inexperienced traders see futures and options as a less expensive way to trade stocks. On the other hand, legendary investors such as Warren Buffett have described derivatives as weapons of mass devastation. Obviously, reality falls somewhere in the middle. Nevertheless, it is feasible to be lucrative in online trading for F&O if you understand the fundamentals.
- Use Options And Futures Trading As A Hedge: This is the fundamental principle of trading futures and options. One of the reasons retail investors are drawn to F&O is that it is a high-margin industry. For example, you may purchase Nifty for Rs 15 lakhs with a margin of just Rs 5 lakhs. This enables you to double your capital by three. However, this is a little risky approach to pursue since, just as earnings may double, losses can also multiply in the future. You must also have adequate cash on hand to pay mark-to-market (MTM) margins if the price moves against you.
- Make Sure That The Trade Structure Is Correct: Another reason traders get their F&O trades incorrect is poor trade structure. Before purchasing or selling futures trading contracts, look for dividends and determine whether the cost of carrying is beneficial. Regarding trading futures and options, the expiration date is quite important. You may choose between close and distant month expirations. While long-term contracts might save you money, they are illiquid and difficult to quit.
- Set A Stop Loss And Profit Goals: The final point to consider is how you handle the trade, which is very important when trading F&O. The first step is to establish a stop loss on all F&O transactions. Remember that this is a leveraged industry, thus, a stop loss is required. Stop losses should ideally be imbued with the trade and not added as an afterthought. Above all, online trading requires tremendous discipline.
Wrapping Up
Keep track of the utmost amount of money you are willing to lose and adapt your approach accordingly. You should never gamble more than you can afford to lose. Above everything, avoid markets that are beyond your grasp. Futures and options are fantastic online trading strategies.
Contrary to the widespread notion, the trading of futures and options is not nearly as complicated as it would first seem. There is no question that if you have a solid comprehension of these cutting-edge financial products, you will be able to use them more effectively. When it comes to trading derivatives or making investments in upcoming IPOs, having a Demat account as well as a trading account is essential. You may open a free demat account by going to Motilal Oswal right now if you don't already have one.
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