How to trade in futures and options
Derivatives trading such as futures and options was launched in the year 2000 in Indian stock exchanges. The only futures and options were initially for indices. Futures and options in individual stocks came in a couple of years later. Futures and options have since become very common and account for much of the stock exchange trading.
Such tools are useful for investors and traders, so it is essential to know how to trade in stock futures and options if you want to make the most of the stock market ups and downs. It's a reasonably good idea to invest in the stock market because equity returns have outperformed most other investments in recent years. Investing in equity and its derivatives bear market risk, and it is often best to proceed with a degree of caution.
It is essential to get your basics before knowing how to invest in F&O. Following are some aspects –
Futures and options are derivatives that derive value from the underlying asset. There are different types of assets available on derivatives. Those include stocks, share index futures, and commodities, such as wheat, coal, gold, silver, cotton, and more. We should concentrate on how to trade in stock market futures and options.
For two primary purposes, these futures and options are used. One is hedging against price risks; another is taking advantage of price changes or speculation.
Future contracts allow a buyer or seller to buy or sell stock in the future at a specific predetermined price on a given date. For instance, there will be an expected increase in the share price of company XY, which is currently at INR 60. You then buy 1,000 XY futures at INR 60. So if the share price of XY goes up to INR 80, you will make 80-60×1000, or INR 20,000. If the prices fall INR 40, you make a loss of INR 20,000.
Options grant a buyer or seller the options in the future to buy or sell stock at a specified price on a set date. The difference between a prospect and an options is you have the choice not to exercise the contract at a later time.
There are two types of options – call and put option. A call option lets you buy a specific stock, while a put option allows you to sell the stock. Put options are a better when the stock prices might fall.
It is crucial to understand how to trade in futures and the principle of margin. Margin is what the broker has to pay for a futures trade.
