Everything You Need to Know About Futures and Options Stocks
The stock market has evolved to help investors and traders earn good returns by identifying opportunities and using them optimally. From the buy-and-hold days of stock investing to intraday trading and futures trading and options trading, investors have numerous avenues to earn. In this article, we will talk about what futures and options in the stock market are and share everything that you need to know about F&O stocks.
What are Futures?
Futures are derivatives contracts wherein the buyer and seller of the contract are obligated to fulfil the contract at the set price and date. During futures trading, if the value of futures of a stock is ₹100 today and you expect it to be valued at ₹120 by the end of the month, you can buy a futures contract for ₹100. If the price reaches ₹120 as expected by you, then you earn a profit. When you buy a futures contract, you can’t cancel it.
What are Options?
Options are also derivatives contracts where the buyer of the contract is not obligated to buy or sell the underlying share at the set date and price. In options trading, buyers have the right to cancel the contract if they feel that the market will move contrary to their expectations. The buyers pay a premium to buy this right.
What are F&O Stocks?
Futures and Options stocks or F&O stocks are stocks that are traded as derivatives. These derivatives contracts don’t have any intrinsic value and derive their value from the price of the underlying stock.
Tips for new F&O traders
If you are new to F&O trading, here are some tips to help you get started:
- Many new traders try to buy futures and options too close to the last day of the monthly contract period. This can be counterproductive since the share price is usually higher closer to the last day and volatile too. Hence, make sure that you buy early when the prices are low and have enough time to allow the share price to move in the direction you want.
- A derivatives contract expires on the last Thursday of the month in which the contract has been entered into. If you have not squared off your position by withdrawing your profits or closing your position, then you should receive intimation from your broker about the profits or losses made.
- When you start trading in futures and options, it is important to ensure that you are aware of all the costs associated with trading like brokerage, stamp duty, GST, etc. This will help you determine the breakeven point to ensure profits.
- When you start trading, make sure that you make small bets. This will help you gain an understanding of the futures and options market without risking too much money.
- It is important to remember that in a futures trading contract, the buyer cannot cancel the contract even if the market is moving contrary to expectations. However, in an options trading contract, the buyer’s loss is limited to the premium paid for the contract.
- When the value of the future or options contract becomes highly volatile just before the declaration of the results, it is possible that the margins rise. This would require you to have enough funds to increase the margins. If you fail to do so, then the number of positions can drop to accommodate the increased margins.
- There are times when the stock exchange bans future and options trading in certain stocks. It is important to ensure that you don’t increase your position in such stocks as it could lead to heavy fines.
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What is a Future Option?
If you have recently started trading in the stock market, the chances are that you have understood its basics by now. Trading in the stock market basically includes buying and selling the shares listed on the stock exchanges (National Stock Exchange and Bombay Stock Exchange) to generate profits.
What Are Futures Contract?
Futures refer to derivative contracts that obligate the buyer and the seller to transact a stock, security, or commodity at an agreed-upon future price and date. It is also known as futures contracts. The agreements are legally binding. On expiry, it must be settled either in cash or by physical delivery.
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.
Frequently Asked Questions
You need a trading account and a linked bank account to commence trading in Futures and Options. It is important to remember that you don’t need a Demat account for the same. You can start trading in Futures and Options as soon as you have deposited your initial margin with a broker.
F&O or Futures and Options are derivatives contracts. While a futures trading contract makes it mandatory for the holder to buy or sell the underlying security at the set date and price, an options trading contract confers a right on the holder for the same. The buyer of an Options contract pays a premium for getting the right to cancel the contract if needed.
There are many benefits of trading in futures and options (derivatives) as listed below:
- Since the value of a derivatives contract is linked to the price of the underlying asset, buying a derivative contract that moves opposite to the value of the asset can be a great way to hedge the risk of buying the asset.
- The transaction costs associated with derivatives are much lower as compared to shares.
- Arbitrage is a part of derivatives trading that helps in bringing out price corrections in the market.