Trading in Futures and Options (F&O)

• Futures and options are derivatives which derive their price from an underlying asset, such as a stock, bond, commodity, etc.
• Futures and options act as a hedge against risk as they try to get returns from a stock or an index without having to invest the full amount.
• Understanding how to trade in futures and options is essential before you start to deal in these contracts.

Futures and options (F&O) are types of derivatives in the stock market. They derive their price from an underlying asset, such as a stock, bond, commodity, etc. These are contracts signed by two parties - a buyer and a seller - for trading an asset at a predetermined price on a future date.Investors invest in futures and options to hedge market risks involved in the stock market by locking in the price beforehand. Since it is difficult to predict the exact future price movement of a stock, inaccurate predictions in F&O trading can lead to substantial profits or losses.F&O trading requires thorough market knowledge and is more complex than equity investments. Unlike stocks, which can be directly traded on the stock market, derivatives are instruments that lack a present value.

Now that you have understood the meaning of futures and options, here is a step-wise guide on how to begin F&O trading:

• Step 1 : The first step to begin F&O trading is to create a trading account with a broker, either offline or online, where you can buy and sell futures and options contracts.
• Step 2 : Next, log on to the portal to browse through the various F&O options available.
• Step 3 : Do proper research on the kinds of futures and options available and choose what suits you as per your budget, risk profile, and time limitations.
• Step 4 : Enter your order details to buy the futures and options at the strike price. Strike price is the price at which an option contract owner buys or sells the underlying asset.

Futures and options can be traded in contracts ranging from one month, two months or three months. Futures trade at a future price which is normally at a premium to the current price of the underlying asset owing to the time value.Both futures and options act as a hedge against risk as they try to get returns from a stock or an index without having to invest the full amount. Also Read: What are Futures and Options (F&O) in Stock Market?

Let us assume you buy stocks worth ₹100,000 in a futures contract with a 20 per cent margin, i.e. for ₹20,000. To execute this contract, you will have to keep aside ₹20,000 with your broker.If the stock price rises by 10 per cent, you will make a profit of ₹10,000 by just putting aside ₹20,000. This implies that your profit margin is essentially 50 per cent instead of 10 per cent, which would have been the case if you actually bought the stock at the market price.However, the down side to this trade is that the possibility of making a loss is also equally present. If the stock price falls by 10 per cent, you will make a loss of ₹10,000.

Futures and options indicate the underlying asset’s price and you can place your bet on its expected future price. Trading in derivatives means speculating on the value of financial instruments such as stocks , bonds , etc.Understanding how to trade in futures and options is essential before you start to deal in these contracts. Additionally, you should be well versed with fundamental analysis, technical analysis, and F&O trading strategies to participate in such trades.