You can buy stocks and hold them for the long term, invest in Mutual Funds, or do Future and Options Trading. Each method has risks and rewards, and you must decide which is correct. Let us learn how to make profits with Futures & Options. We will also learn the basics of each type.
So, whether you are a beginner or an experienced trader, read for some tips to help you succeed in Derivatives Trading.
What is Futures Trading?
This contract involves buying and selling future commodity delivery or security. The Futures Contract buyer agrees to purchase an asset, such as a barrel of oil, at a set price on a future date. They are traded on exchanges and can be used to hedge against price risk or speculate on the direction of markets. For example, if you expect the oil price to rise, you might buy a crude oil Futures Contract.
If the price of oil increases, you can sell the contract at a profit. If the price falls, you incur a loss. Futures Trading is complex and risky, so it is essential to understand how it works before getting involved.
What is Options Trading?
This is where you trade contracts that offer the right, but not the obligation, to buy or sell an asset at a set price on or before a specific date. Options Trading can speculate on the future price movement of a stock, index, or other assets or hedge against losses in another asset you own. For example, if you own shares of stock in XYZ Corporation, you could buy a Put Option on XYZ stock to protect against the stock price decline.
If the stock price does go down, you can exercise your Option to sell the shares at the fixed strike price, limiting your losses. Similarly, if you think the stock price will go up, you could buy a Call Option, which provides the right to purchase shares at a set strike price. If the stock price rises above the strike price, you can exercise your Option and buy the shares at the lower price, resulting in a profit.
Options Trading is challenging, so it is important to understand all the terms and conditions before entering any contracts.
Things to remember
- Futures are leveraged products that work both ways. You may sail if you understand the impact of leverage through margins, be it profit or losses.
- Buying Options involves limited risks. However, you rarely make money. Many small Futures & Options investors prefer buying Options owing to limited risk and the only risk involved are the premiums.
- Margins on Futures can go up sharply during volatile conditions. You either need to bring fresh margins or the broker compulsorily cuts your position. Be wary of this risk.
- Keep an eye on the costs you incur with F&O Trading. If you think the brokerage and other related costs are lower, then reconsider. In percentage, they may be lower than Equity, but you churn more often under F&O. This include brokerage, GST, stamp duty, statutory charges, and STT.
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