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TRADE IN FUTURE AND OPTION

About future and option

Future and option can be utilised  by Investors as financial instruments to generate returns or serve as a hedge against any existing investments they may have. Any investor may buy any investment at a specific price by a specific time and date by using both a future and an option. as financial instruments to generate returns or serve as a hedge against any existing investments they may have. Any investor may buy any investment at a specific price by a specific time and date by using both a future and an option.

An investor who has an option contract has the opportunity, but not the duty, to buy or sell stock at a certain price. If the contract is enforceable, this transaction may take place whenever it chooses. In contrast, in a futures contract, unless the shareholder’s position is closed prior to the date of expiry, the buyer must acquire shares (and the seller must sell shares) on a specific date in the future.

Check volatility in FnO market

Get a good feel on the level of implied volatility for the options you are considering as it is one of the key factors affecting an option’s price. Since this will be a crucial element in determining your option trade or strategy, compare the implied volatility level with the historical volatility of the stock and the level of volatility in the overall market.

Using implied volatility, you may determine whether or not other traders anticipate the stock to move significantly. If a trader believes implied volatility won’t keep rising, high premiums will climb, making writing an option more appealing (which could increase the chance of the option being exercised). Cheaper option premiums result from less implied volatility, which is advantageous for option buyers.

Latest events and news may effect future and option market

Two major sorts of events can be distinguished: market-wide and stock-specific. Events with a broad market impact include the Federal Reserve’s pronouncements and the release of economic statistics. Events that are special to a stock include earnings announcements, product introductions, and spinoffs.

Before it occurs, an event may have a substantial impact on implied volatility, and once it does, it may have a significant effect on the price of the stock. Do you want to profit from the spike in volatility leading up to a crucial event, or would you prefer to stay put until things calm down?

You can choose the ideal time frame and expiration date for your option trade by identifying events that might have an impact on the underlying asset.

Money management

You should allocate your funds wisely to trades while trading options and futures. Ideally, you should place several transactions across several time ranges. This lowers the hazards. The proper position sizing can assist you in achieving the best risk-adjusted returns.

Comparatively more capital is needed to trade futures and options than on the cash market. The results are additionally exaggerated in comparison to trades made in the cash market because of the leverage involved. Thus, it is preferable to start off with paper trading. It instils confidence in you, guards against catastrophic losses, and, if there are any obstacles in real life, makes them clear. You can make the necessary adjustments. It can assist you in finding the answer to the elusive topic of how to trade futures and options.

Thing to understand before entering into future and option market

1. Futures are leveraged products that function in both directions. You might have been persuaded by the knowledgeable salesman that since futures only require a 20% margin payment, your profit can be increased by a factor of five. This is how it goes: You pay a margin of Rs. 20,000 to purchase equities worth Rs. 100,000 in futures. If the price increases by 10%, your margin profit of Rs. 10,000 will actually be 50% because it is leveraged five times. Therefore, what the zealous salesman told you was accurate. He did not warn you that it also applies to losses, which have a tendency to be amplified when you trade futures.

2. In erratic markets, futures margins might increase significantly. Many of us think that futures have an advantage over cash market purchases since margin purchases allow for leverage. But during volatile times, these margins may increase significantly. Assume you paid a margin of 15% to purchase GMR futures. Up to 25% of your liquidity is available for use. However, the stock’s volatility spikes all of a sudden, and the margins are changed to 40%. You’re currently in a pickle! Your broker will forcefully cut your positions until you bring in new margins. When you trade F&O, be mindful of this risk.

3. Although there is little risk involved when buying options, profits are unusual. Because your risk is constrained to the premium you pay, buying options is a popular choice among small F&O traders. Over 97% of all options expire worthless, which is an issue. That means that if you purchase options, you only have a 4% chance of profiting from them. The fact is that option sellers profit more frequently than option buyers because they take a bigger risk. Don’t, therefore, just let the claim that your risk when purchasing options get the best of you. The truth is that when you purchase options, your chances of profit are likewise constrained.

4. Always trade F&O with profit targets and stop losses in place. For all leveraged positions, this is true. Your primary emphasis when trading futures and options is that of a trader, not an investor. Your focus should therefore be on safeguarding your capital. Only by clearly defining your loss and profit trade-off for each trade is that possible. Don’t try to question stop loss because it is a discipline. No matter how you feel about the stock, you must strictly follow the stop loss and profit booking levels while trading F&O.

5. Even if you are uncertain of the market’s direction, you can trade options. One of the F&O market’s most enduring characteristics is its capacity for non-directional strategy. To trade markets when you are unsure of the direction, you can combine options and futures. Options can be used to make money in both erratic and sluggish markets. You find more value in these characteristics of options than utilising them to replace stock trading. Leveraged trading of futures and options is a common practise. In this case, the entire cost of trading is not paid upfront. Instead, as long as an investor maintains a minimum balance in the investor’s trading account, a broker may finance a specified part of the entire contract. As a result, the investor’s profit margin dramatically increases. Even while trading forex and options may be very profitable, there are hazards involved that you should be aware of. Contrary to popular belief, trading futures and options is not as complex as it may seem. You’ll use these cutting-edge financial products better if you have a proper understanding of them, no doubt about it!

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