Trading in futures and options is significantly more complicated than investing in stocks, and you will require a deeper comprehension of the complexities. Because futures contracts and options contracts are only valid up until their respective expiration dates, trading in these financial instruments does not require a Demat account. Because of this, they are more analogous to contracts than they are to assets. First, it is important to understand what F&O trading is in the share market. You must acquire a fundamental understanding of futures and options trading before beginning your adventure in F&O.
Before you make your first deal in future options, there are four things you absolutely must be aware of.
1. Futures are a type of leveraged instrument, and they can be used in either direction.
It's possible that the savvy sales guy came to you and told you that because you only pay a 20% margin on futures, the amount of money you make can be doubled by 5 times. This is how it should be done! You pay a margin of 20,000 rupees to acquire equities with a total value of 100,000 rupees while trading in futures. Because it is leveraged five times over, if there is a 10% increase in price, then your margin profit of Rs.10,000 is equal to a 50% increase because of the leverage. Therefore, the information that the ecstatic salesman provided was accurate.
2. Purchasing options allow you to take on less risk, but it is difficult to profit from this strategy.
Because your loss is restricted to the amount of the premium you pay, buying options is the strategy of choice for many smaller F&O traders. Over ninety-seven percent of all options that are exercised end up being worthless. This is the problem. If you buy options, then you only have a 4% chance of coming out ahead financially if you choose to exercise those options. The fact is option sellers are subject to a greater degree of risk, and as a result, they are more likely to turn a profit than option purchasers. Therefore, you should not just let yourself be persuaded by the idea that your risk in purchasing options is restricted. When you buy options, there is no getting around the fact that your chances of making a profit are significantly reduced.
3. The distinction lies in the asymmetrical nature of the available options.
Both sides will benefit equally from a trade that is symmetrical if "A" purchases RIL futures at Rs. 920 and "B" sells these futures. If the price ends up being 940, then A will have made a profit of Rs. 20 whereas B will have suffered a loss of Rs. In this scenario, the opposite outcome will occur if the share price falls to 900 rupees. However, in the case of options, the buyer's potential loss is capped at the amount of the premium, whereas the selling faces the possibility of incurring an unlimited loss.
4. During periods of high volatility, margins on futures contracts may see significant increases.
Many of us believe that purchasing futures has an edge over purchasing in the cash market because of the ability to magnify your investment by purchasing on margin. But during periods of volatility, these margins are subject to significant expansion. Let's say you bought GMR futures by paying a margin of 15%, as an example. You have access to up to 25% of the available liquid assets. Nevertheless, there is an abrupt increase in the stock's volatility, and the margins are recalculated to be 40%.
Conclusion
The buying and selling of futures and options means F&O trading is not as complicated as it is portrayed. Having the necessary knowledge will undoubtedly assist you in making more effective use of these cutting-edge financial products.
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