Futures and Options are complex avenues in stock market trading that require you to develop and implement trading strategies. They are derivative products that get their value from their underlying assets.
However, if you are just starting with F&O trading, it is crucial that you know the basics to have successful trades. To get you started, here is a beginner’s guide to Futures and Options trading.
What are Futures and Options?
Futures and Options are products of the stock market, also called derivatives, as they “derive” their value from an underlying asset, such as stocks, bonds, commodities, etc. They are essentially contracts that give those entering them rights to buy or sell the stock at a set time and at a set price. However, depending on whether it is a Futures or Options contract, these contracts will hold obligations to perform their execution accordingly.
Futures:
- It gives the purchaser the right to buy or sell a particular underlying asset at a predetermined price and on a set date in the future.
- Those entering a Futures contract are obligated to execute their contracts on the expiration date, regardless of whether they are in their favour.
- It can be used for hedging or speculating.
Options:
- Options contracts also give the purchaser the right to buy or sell the underlying asset at a set price.
- However, they are not obligated to execute it before or on the expiration date of the contract.
- This can be used for hedging, speculation, and generating income.
What are the Benefits of Futures and Options Trading?
● Diversification
By investing in Futures and Options, you can distribute your funds across various market sectors and assets. This reduces risks and helps maximise profits.
● Speculation Opportunities
With advances in technology and gaining more skills, you can predict the market movements and make the best use of speculative opportunities in any market condition.
● Leverage and Hedging
Leverage allows you to buy or sell large positions in the F&O market, which is otherwise not accessible to investors. Moreover, with F&O trading, investors can hedge against price fluctuations in the market.
Steps to Start Trading Futures and Options
1. Select the Best Trading Platform
It is of utmost importance that you select the right trading platform to successfully trade in the Futures and Options markets. Carefully review features, such as real-time information availability, top security, registration under SEBI, quick entry and exit in trades, etc.
2. Open Your Trading Account
Open your trading account and fill out some mandatory information, such as name, DOB, bank details, etc., along with KYC completion.
3. Learn New Strategies and Start Trading
Once your account is active, you can use the platform’s analysis tools, carry out research and start trading.
Tips for Successful Futures and Options Trading
● Utilising Stop loss
Using stop loss is one of the most beneficial strategies for minimising losses and auto-executing trades. This helps you set strict targets and practise disciplined trading.
● Using Analysis Tools
Conduct a thorough analysis of your trades and make the most of the tools and charts available on your trading platform.
● Stay Up-To-Date About Market Trends
Market trends and movements constantly change. It is crucial to stay updated about current market conditions and make accurate predictions to know when to enter and exit a trade.
Conclusion
Future and Options is a lucrative market with a high potential of earning huge profits. However, with high profits and leverage, there is also high risk involved. Thus, before you start trading, ensure you select the right trading platform, utilise risk management tools, gain knowledge about this avenue and trade wisely.
FAQs on Futures and Options Trading
Q1: What are Futures and Options in stock trading?
A: Futures and Options (F&O) are financial derivatives that derive their value from an underlying asset, such as stocks, indices, commodities, or currencies.
- Futures: A contract to buy or sell an asset at a predetermined price on a specific future date.
- Options: A contract giving the buyer the right (but not the obligation) to buy (call) or sell (put) an asset at a specified price within a certain period.
Q2: How does Futures trading work?
A: In Futures trading, two parties agree to buy or sell an asset at a future date. Both parties are obligated to fulfill the contract terms, regardless of the market price on the expiration date. Futures contracts are commonly used for speculation or hedging purposes.
Q3: What is the difference between a Call Option and a Put Option?
- Call Option: Gives the buyer the right to purchase the underlying asset at a predetermined price within a specific period.
- Put Option: Gives the buyer the right to sell the underlying asset at a predetermined price within a specific period.
Q4: Who should trade in F&O?
A: Futures and Options trading is suitable for:
- Experienced traders: Seeking to speculate on market movements.
- Hedgers: Protecting their investments against adverse price changes.
- Institutions: Managing large portfolios and minimizing risks.
It is not recommended for beginners due to the high risks involved.
Q5: What is the margin requirement in F&O trading?
A: The margin is the initial deposit required to enter into a Futures or Options contract. This margin acts as collateral to cover potential losses. The margin requirements are set by stock exchanges like NSE and BSE and vary depending on the contract.
Q6: What are the risks of Futures and Options trading?
- High Leverage: Can amplify both profits and losses.
- Market Volatility: Rapid price changes can lead to significant losses.
- Expiration Risk: Contracts have a limited lifespan and can expire worthless.
- Complexity: Understanding F&O requires knowledge of financial markets.
Q7: How is F&O trading taxed in India?
A: F&O trading is considered a business income in India. The profits are taxed as per the trader’s income tax slab. Losses from F&O trading can be carried forward and set off against future business income for up to 8 years.
Q8: How is the settlement done in Futures and Options?
- Futures: Settled either in cash or by delivery of the underlying asset at the contract’s expiration.
- Options: Only exercised if the buyer decides to utilize the contract’s rights; otherwise, the contract expires.
Q9: Can I start F&O trading with a Demat account?
A: Yes, you need a Demat account linked to a trading account to trade in Futures and Options. You also require a margin amount as per the broker and exchange guidelines.
Q10: What are the most traded F&O contracts in India?
A: The most traded F&O contracts in India include:
- Nifty 50 Futures and Options
- Bank Nifty Futures and Options
- Reliance Industries, Infosys, and TCS stock Futures and Options
Santosh Kumar is a Professional SEO and Blogger, With the help of this blog he is trying to share top 10 lists, facts, entertainment news from India and all around the world.