When you start trading in derivatives, choosing the best futures or options is crucial. Since derivatives are valued based on the value of the underlying security, when we talk about equity derivatives, the value can change based on the volatility in the share price. In this article, we will look at ways in which you can find popular futures and options for futures trading and options trading.
Published on 01 March 2023
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What are Futures and Options?
Before we talk about the futures and options for futures trading and options trading, let’s look at some basics:
What are Futures in the stock market?
Futures are derivative contracts that obligate the buying and selling of the underlying asset at the set price and date.
What are Options in the stock market?
Options are also derivative contracts regarding the buying or selling of an underlying asset at a set date and price. However, they give the holder of the Option the right to execute the terms of the contract. The buyer of the Option pays a premium for getting this right.
Since futures and options are different instruments, we will look at the aspects that you need to consider to find the best ones separately.
How to find the Futures contract for Futures trading?
Choose the right trading platform. While this might seem rudimentary, the right trading platform can help you analyze various Futures available and make an informed decision. Choose one that is reliable, fast, cost-efficient, easy to use, and provides access to different exchanges. It should also have tools that can help you analyze market data with ease.
When you buy a Futures contract, you need to deposit money with the broker. This is called margin. This amount can vary based on the Futures contract you choose and also on the stockbroker. Make sure that you have sufficient funds in your trading account before choosing one.
Another important aspect that can help you choose the Futures contract is the liquidity of the contract. If the liquidity is low, then you might have to sell the contract at a lower price. Make sure that you choose a contract that has adequate liquidity.
Volatility is also an important aspect of a Futures contract. If the price of the underlying asset is volatile, then you have a better chance of earning profits. However, make sure that you choose a volatility level as per your risk tolerance level.
How to identify the optimal Options contract for Options trading?
Ensure that you are clear about why you want to trade in Options. This is an important step as it can help choose the Options contract for you.
Choose the right type of Options contract. Options can be broadly divided into two types – Call Option and Put Option.
A Call Option is a good choice if you believe that the price of the underlying security will rise. This Option allows you to buy the asset at a set price in the future. There are many types of Call Options like the Naked Call Option and Covered Call Option. Make sure that you understand these choices before making a decision.
A Put Option is a good choice if you believe that the price of the underlying asset will fall. This Option allows you to sell the asset at a set price in the future.
When you buy an Options contract, you have to pay a premium amount. This is the maximum loss you will make if the markets perform contrary to your expectations and you decide to exercise your right of not fulfilling the contract.
Timing is of utmost importance in derivatives trading. Make sure that you study the Options contract and underlying asset carefully before investing.
Don’t forget to keep your risk tolerance levels in mind while investing in derivatives. Also Read: Call Put Options
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Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
When you start futures trading and options trading, you need to remember that sometimes, the stock exchange bans futures and options trading on certain stocks. When the exchange implements the ban, traders cannot open new positions on the said stock. However, they can square off their existing positions.
In recent years, there has been a marked increase in derivatives trading, with many new traders opting for trading in futures and options. In fact, many people have started identifying the earning opportunities offered by futures and options trading and are turning trading into their full-time profession along with their regular jobs.
If you look at equity derivatives or equity futures and equity options, then these contracts have shares as the underlying asset. Therefore, the volatility in the price of the shares will impact the value of the derivatives contract. Also, like in the share market, you will invest based on your assessment of the direction the share price might take. Hence, risks are similar.
However, with futures and options, since the trading is usually based on leverage, the chances of big losses are higher. Hence, you must ensure that you keep your risk tolerance levels in mind while selecting a Futures or Options contract for futures trading and options trading.
Derivatives contracts are good hedging and risk management tools. They usually have lower transaction costs compared to trading in shares. The contracts are naturally leveraged, allowing you to take higher exposure with less capital. You can invest in derivatives with different underlying assets like stocks, commodities, market indices, etc.
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How to Trade in Futures and Options?
Futures and options trading was introduced in Indian stock exchanges in 2000. Futures and options are known as derivatives because they derive their value from an underlying asset. However, the two are not the same. Futures trading differs from options trading in some ways.
When you start futures trading and options trading, you need to remember that sometimes, the stock exchange bans futures and options trading on certain stocks. When the exchange implements the ban, traders cannot open new positions on the said stock. However, they can square off their existing positions.
In recent years, there has been a marked increase in derivatives trading, with many new traders opting for trading in futures and options. In fact, many people have started identifying the earning opportunities offered by futures and options trading and are turning trading into their full-time profession along with their regular jobs.
If you look at equity derivatives or equity futures and equity options, then these contracts have shares as the underlying asset. Therefore, the volatility in the price of the shares will impact the value of the derivatives contract. Also, like in the share market, you will invest based on your assessment of the direction the share price might take. Hence, risks are similar.
However, with futures and options, since the trading is usually based on leverage, the chances of big losses are higher. Hence, you must ensure that you keep your risk tolerance levels in mind while selecting a Futures or Options contract for futures trading and options trading.
Derivatives contracts are good hedging and risk management tools. They usually have lower transaction costs compared to trading in shares. The contracts are naturally leveraged, allowing you to take higher exposure with less capital. You can invest in derivatives with different underlying assets like stocks, commodities, market indices, etc.
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