Futures and Options trading are two popular types of different trading options in the stock market. These are great for seasoned traders as they require more market expertise. If you are looking to up your profits, read on to learn more about futures and options trading!
Table of Contents
What is Future and Options Trading?
Future and options trading both do not require demat accounts as they are only valid till an expiry date. Hence, they are treated more like contracts than assets, even though they deal in stocks and other market-linked securities.
In futures trading, the investor must buy/sell the stock at a pre-specified price on or before the contract’s expiry date, regardless of whether they profit or lose.
Options trading also allows investors to buy/sell a stock at a particular price and date, but the investor is not obligated to buy/sell the stock by the expiry date. They can sell (for buy positions) if the price increases or let the contract expire if the price decreases.
Why Consider Future And Option Trading?
- Risk Management: Future and Options trading allows traders to manage their losses. For example, if you predict the price of a stock will go up, you can buy a futures contract at its current price to secure a higher price when selling.
If you think the price will go down, you can buy a put option to let you sell the stock for a specified price to minimise your losses.
- Leverage: You can make bigger trades with little money. This can be done by borrowing money from your broker or another lender. Doing so can get you higher returns and allow you to enter markets you previously couldn’t afford.
- Volatility: During price fluctuations, you can make money by selling the options contract. When sold, the seller gets paid a premium.
- Liquidity: Since futures and options are traded on regulated exchanges, they can be easily bought and sold. This means you can easily buy/sell stocks and do not have to worry about enough market demand.
Types of Future and Options
- Futures Contracts: These are standardised contracts traded on stock exchanges. They are settled daily, come with fixed due dates and uniform terms and offer a fixed payment on the agreed-upon date.
- Call Options: Lets you buy a stock at a fixed price on or before the due date. A call option will become more valuable as the stock’s price increases.
- Put Options: Lets you sell a stock at a fixed price before the due date. These can be purchased to minimise losses against price falls.
Creating a Trading Plan
First, you need to set up clear objectives and get to know how much risk you are comfortable with. This will determine how much money you are comfortable investing.
You also want to set up proper risk management strategies, like establishing proper entry and exit criteria. These could be indicators, chart patterns or even price levels that will determine when you enter/exit a trade or how you buy/sell your contract.
Common Mistakes to Avoid
- Avoid impulse moves like over-trading and chasing your losses. These can minimise profits and negatively impact financial stability.
- Beginners should start with options trader as you are not obligated to buy in the due date. Jumping in futures trading or even options trading can prove detrimental.
Conclusion
Overall, futures and options trading greatly minimise risk for traders, allowing them to deal with volatility effectively. Moreover, if you want to bolster your trading strategy, having access to a good trading broker in India is also vital.
