Futures & Options Trading and How to Make Money
Investing in futures and options comes with its risks. Most seasoned traders believe that you require a lot of funds to start futures and options trading. But some individuals have started small and earned fortunes. Therefore, it is your trading ability that makes all the difference.
If you get your basics right, it is possible to make money in F&O trading online.
How to Make Money in Futures and Options Trading Online
1.Don’t use F&O as a trade, instead use it as a hedge.
Retail investors are lured towards futures and options because it is a margin business. For instance, you can buy Nifty worth ₹5 lakhs at a margin of only ₹1.5 lakhs. As a result, you can leverage your capital by three times.
However, the strategy is risky because profits and losses can multiply equally in futures trading, depending on the stock’s movement. Besides, you must have sufficient cash to clear off the mark-to-market margins if the price fluctuation goes against you.
Also Read: What is Margin Money in Stock Market?
Experts recommend that you use futures and options for hedging. To get a better understanding of this, let’s take the following example:
You have shares of Infosys at ₹1500, and the current market price is ₹1700. You can sell the futures at ₹1710 and lock in profits of ₹210. Now, regardless of how the price fluctuates, your profit of ₹210 is locked in.
2.Structure the trade correctly.
Most traders fail in their trades in futures and options because they don’t get the structure right. Now, you might wonder what the structure of options trading or futures trading is?
When you buy or sell futures, check for dividends and understand if the cost of holding a position is favourable.
The expiration date is also of crucial importance in futures and options trades. You can opt for a near month, middle month, or far month expiry. Each has its pros and cons. Far month contracts enable you to reduce costs, but they are illiquid and make exit difficult.
What about the strike in options trading? While deep out of the money (OTM) options look cheap, they are worthless. On the other hand, deep in the money (ITM) options are similar to futures and don’t add value.
Know More about the Difference of OTM,ITM & ATM
Additionally, you must learn more about options valuation. The options trading terminal has an interface to help you see the valuation of the option based on the Black and Scholes model. Use this to buy undervalued options and sell overvalued options.
3.Concentrate on trade management
Lastly, you must focus on managing the trade. Make sure you maintain a stop loss on all F&O trades. Futures and options trading allows investors to increase their exposure to the market by paying less than the full investment amount. Thus, having a stop loss is a must. You must impute the stop loss with the trade instead of inserting it later. Please know that stop-loss is a strict discipline when trading online.
What you book in F&O are profits. The rest is book profits. You must act quickly to churn your money if you want to make money. Keep track of the maximum capital you can lose and as you hit that limit, rework your strategy. Do not bet more than what you are willing to lose.
Futures and options are fast-moving trades. They experience margin fluctuations regularly. While equity is for long-term investors, futures and options are for traders who wish to earn quick returns. However, they must know how to plan futures and options trading to protect themselves from a volatile market and increase their gains slowly.
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Futures and Options Stock List with Lot Size
In the share trading market, futures and options (F&O) are two types of stock derivatives. F&O are known as stock derivates because they are essentially contracts whose prices are derived from underlying assets such as commodities, shares, ETFs and others.
A futures contract lets investors carry out a stock transaction at a specific price for delivery at a future date. In the case of options, the call option helps investors purchase the common stock for a particular price at a future date, while the put option lets them sell the common stock.
What are Futures and Options in Trading?
Futures and options are both stock derivatives that are traded in the share market. Investors use them to hedge their current investments in highly volatile situations....Read More
Difference Between Futures and Options Trading
If you are into stock trading, you understand that the equity and equity derivatives market. The equity derivatives market is much bigger than the equity market. Derivatives are financial contracts that derive value from the underlying assets, such as stocks, currencies, commodities, indices, exchange rates, etc....Read More
Frequently Asked Questions
Broking firms registered with BSE or NSE let you buy/sell options contracts. These brokers offer online platforms and/or mobile applications for options trading online. When you decide to open an account for trading, ensure that the broker provides futures and options trading and supports all types of futures and options, such as currency, index, commodity, equity, etc.
For futures trading, you have some common types of futures contracts. These include index futures, stock futures, commodity futures, currency futures, and interest rate futures.
For options trading, you have two types of options contracts - Call option and Put option. The former gives traders the right to buy the underlying stock at the strike price on or before the contract’s expiration date. The latter gives traders the right to sell the underlying stock at the strike price on or before the contract’s expiration date.
In India, you can trade futures and options in the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
The price at which a trader can execute (buy/sell) the option contract is the strike price.