Move a little beyond equity investing, and you will come across futures and options.
Popularly known as F&O, futures and options investing is more complex when compared to equity investing.
But that’s what makes them interesting! As per the Business Standard report, active stock market investors’ accounts rose by approximately 10.4 million in 2020 alone.
Further, as per Financial Express, the daily average turnover in July 2020 in the F&O segment crossed Rs. 19 lakh crores. This is higher than the pre-covid months! Exciting, right?
However, you must understand its various nuances before dealing in F&O. If you are eager to explore futures and options, here’s a beginner’s guide to everything you need to know before beginning your journey.
What are futures and options?
A future is a contract to buy or sell an underlying asset at a predetermined price on a specific date.
Options, however, allow the holder to buy or sell an underlying asset on a specific date at a predetermined price.
Both futures and options are known as derivatives as they derive their value from the underlying asset.
Trading Strategies for Beginners
As you understood about F&Os, it’s time to have a look at a few strategies that you can start with as a beginner in the F&O segment:
This is one of the simplest strategies whereby you should just buy a call option.
If the share price increases, you can exercise the option and purchase the shares at the strike price.
If the share price reduces, you have the choice not to exercise the call option. The loss would only be of the premium amount.
In this case, you short the put option meaning that you sell the put option whereby you give the buyer the right to sell the shares at the strike price.
You anticipate that the share price will rise in the future, and thereby the option holder will not exercise the option.
Your reward for using the short put strategy is the premium you receive for selling the put options. However, if the share prices fall, you can incur unlimited losses.
In this strategy, you can take advantage of market volatility. You need to purchase one call option, and one put option at the same strike price of the same expiry date and for the same asset.
You will make a profit irrespective of the direction in which the stock moves. If the price increases, then you can exercise the call option.
In case the prices fall, then you can exercise the put option. Thus, this opens the doors for unlimited profits while minimising the risks simultaneously.
Again, this is a relatively simple strategy whereby you hold the put option. This strategy is an excellent fit for you if you are bearish and anticipate a fall in the share prices.
As the prices fall, you can exercise your put option to sell the shares at the strike price. This strategy has the potential for unlimited returns with limited risk.
There are many futures and options trading strategies.
The strategy you adopt will depend on the market situation, the F&O you are dealing with, and your risk appetite.
F&Os are not rocket science, but it’s always wiser to obtain a thorough understanding before trading.