Opening your futures and options account with a broker is the first step to trading in this type of investment method. Futures and options are much more complex than equity investing and you need to understand the nuances better. You do not need a demat account to deal in futures and options as they are valid only till their expiry date. Therefore, they are more like contracts rather than assets.
Let us first understand what is F&O trading in stock market. Before you start your F&O journey you need to understand how to trade futures and options. So, here is a quick preparation guide for futures and options trading for beginners.
What is futures and options?
With an options contract, an investor has the right (but no obligation) to buy or sell a stock at a certain price. This transaction can take place at any time, provided the contract is valid. In contrast, in a futures contract, the buyer must buy the shares (and the seller must sell the shares) at a certain date in the future, unless the shareholder’s position is closed out before the expiration date.
Futures and options represent financial products that investors can use to make returns or as a hedge against any existing investments they have. Both futures and options allow any investor to buy any investment at a particular price by a particular time and date. However, the markets for both of these products are quite distinct in terms of the way they work and the risks they pose to investors.
Futures and alternatives are sorts of monetary derivatives. For newcomers, the world of futures and options trading can seem intimidating. By outlining their concepts, variations and useful applications, this in-depth book seeks to share knowledge on these financial products in the simplest way possible. Trading in FNO demands a constant companion with risk management.
The dynamic nature of the stock market draws attention to learning new things with passion. Let’s explore some of the deeper intricacies of futures and options trading in this blog.
Understanding F & O
Before diving into our initial fundamentals of how futures and options actually work in a practical scenario, it is important to understand the meaning of F&O in a little more detail. Options are a form of investing that deals with derivatives. They may be offers to buy or sell stock, but they do not actually represent actual ownership of the underlying investment, at least not until the agreement is final. Typically, buyers pay a premium for contracts in options, and these represent a hundred shares of whatever the underlying asset is. The premium is indicative of the “strike price” of the asset which is essentially the rate to buy or sell until the contract expires. This is the date that indicates when the contract is to be exercised.
Now that you have a basic understanding of how options operate, you can turn your attention to the future. In futures and options trading, a futures contract represents an obligation to buy or sell any asset at a pre-agreed price at a future (later) date. Futures act as a true hedge as far as your investments are concerned, and this is well understood when you consider commodities like oil or wheat. For example, a farmer may initially want to lock in an acceptable value (price) in case market prices drop before delivery of a crop. The buyer may also want to negotiate an advance price if there are indications that prices will rise at the time of crop delivery.
Futures and Options Trading for Beginners
1 Things : Establish a trade plan
The first tip cannot be emphasized enough: plan your trades carefully before establishing a position. This means not only having a profit objective but also having an exit plan if the trade goes against you.
The goal here is to reduce the likelihood that you will need to make important decisions when you are already at risk in the market. You don’t want emotions like fear and greed to dictate your moves, causing you to hold on to a losing position too long or exit a profitable position too early.
A carefully constructed trading plan that includes risk-management tools like stop-loss orders, which we will discuss below, or bracket orders, can help you avoid such errors. For example, let’s say you purchased a December silver contract at $20.00 an ounce. With a bracket order, you can set the stop loss exit at $18.00 per ounce and the profit exit at $25.00 per ounce. This way, you are trying to limit your risk to $2 per ounce while maintaining the profit potential of $5 per ounce.
2 Things : Protect your positions
Committing to an exit strategy in advance can help you avoid significant adverse moves. Many traders try to use a “mental block”, setting a price in their mind as to when they will close the position and cut their losses. But these are very easy to ignore, even for the most disciplined traders.
To make your commitment more firm, consider trading with a stop-loss order. The idea is to first decide on a bailout point and then put a stop to that price.
One-Triggers-Another (OTO) orders allow you to place a primary order and a protective stop at the same time. When the primary order is executed, the protective stop is automatically triggered. This frees you from constantly monitoring the market, and it also frees you from worrying about entering your stop order at the right time.
Just remember, however, that there is no guarantee that execution of a stop order will occur at or near the stop price. Stops are not a guarantee against loss – markets can sometimes move through them quickly. But, in most cases, a stop will help you keep your losses at a manageable level and keep your emotions out of it.
3 Things : Think long—and short
Trading opportunities exist in both rising and falling markets. It is human nature to look for opportunities to buy or “go long” the market. But if you are also unwilling to “go low” on the market, you may unnecessarily limit your trading opportunities. Here’s an example: Let’s say a trader believes that the price of crude oil is about to fall and he wants to take a position by selling December crude oil futures at the current price of $50.00 per barrel, the futures later. The take profit date if the futures price falls below $50.00 per barrel with the expectation of buying back the contract.
With futures you can sell in the market or buy in the market. You can first buy, and then sell the contract to liquidate your position. Or, you can sell first and buy one contract later to offset your position. There is no practical difference between trades: on whatever sell or buy order you place, you must post the required margin for the market you are trading in. Therefore, do not ignore opportunities to reduce
4 Things : Margin calls
If you are affected by margin calls, it is probably because you have been in a losing trade for too long. Therefore, consider a decrease in margin as a warning that you have become emotionally attached to a situation that is not working out as planned.
Instead of transferring additional funds to cover the call or reducing your open position to reduce your margin requirement, you may consider exiting the losing position altogether. As the old trading expression says, “cut your losses” and look for the next trading opportunity.
5 Things : Patient
Don’t get so caught up in market dynamics that you lose sight of the bigger business picture. You should clearly monitor your working orders, open positions and account balance. But don’t stick to every rise or fall in the market. Not only can you drive yourself crazy, but you can also be thrown by small zigzags or whipsaws that appear formidable and significant in the moment but ultimately prove to be mere intraday blips.
Remember, futures trading involves risks, and there’s no guarantee of profits. Always trade responsibly and consider seeking advice from a financial professional before engaging in futures trading, especially if you’re uncertain about any aspect.