Introduction
Trading in Futures and Options requires more advanced trading skills, strategies and understanding of the market than equity. These are derivative products and are dependent on some underlying assets.
While futures and options offer an opportunity to gain profits, they also pose risks that need to be mitigated intelligently. To gain profits and invest in them wisely, you need to apply some key strategies. So here is a blog that discusses strategies for success in futures and options trading.
Understanding Futures and Options
Futures and Options are derivative products of the stock market, which simply means that they derive their value from an underlying asset. These underlying assets can be stocks, commodities, bonds, etc. Trades in futures and options are valid only until their expiry dates.
These contracts are traded on online trading platforms and are regulated by the regulatory body SEBI. While both are derivative products, they are distinctly different.
| Parameters | Futures | Options |
| Definition | Futures contract gives the owner a right to buy or sell a stock but also an obligation to execute on the set date at a predetermined price. | The Options trade gives the right to the owner but is not obligated to sell or buy at a predetermined price before expiry. |
| Obligations | Both buying and selling parties are obligated to execute their contracts. | While the buyer has the right, they are not obligated to buy. But the seller has an obligation to sell it if the buy trade is executed. |
| Use | Used for hedging and speculation. | Used for hedging, speculation, and income generation. |
How to Start Trading in Futures and Options
● Choosing a Reliable Trading Platform:
Select a reliable trading platform with value-adding features like real-time market updates, easy tracking and monitoring, and security and trustability.
● Setting Up a Trading Account
Enter the required information and submit the KYC documents. Fund your account and start trading.
● Understanding Market Analysis
Gain knowledge about the market and the tools that help you carry out analysis. Familiarise yourself with key trading strategies that can help you trade successfully.
Common Strategies for Trading in Futures and Options
1. Long Call and Short Call
These are common strategies used in Options trading. A long call is used when the investor is optimistic that the price of the underlying asset will increase. Alternatively, a short call is when the investor predicts that the price of the asset will go down. Likewise, long put and short put strategies are applied to opposite market situations.
2. Straddle
This is commonly used when the market is highly volatile and investors cannot predict one-way movement. Thus, investors buy both calls and put options for the same asset with the expiration date so they can benefit if the market goes in either direction.
3. Spread
This strategy is used on two closely related assets to predict price differences between them. It can work well in highly correlated markets and help gain profits from their differences.
Tips for Successful Trading Futures and Options Trading
● Risk Management
Use features like stop loss to ensure that you limit your losses to a certain level, let the app auto-execute your trade, and protect your capital.
● Staying Informed about Market Trends
Being up-to-date with the latest financial news and market developments can help you make accurate predictions and anticipate market movements.
● Utilising Trading Tools and Resources
Analysis tools, charts and other educational materials can help you enhance strategies and understand the concepts better, impacting your trading decisions.
Conclusion
Investing in futures and options requires in-depth knowledge and understanding of the concept and market conditions. Entering these contracts exposes you to potential risks and gains at the same time. But with the implementation of the right strategies, you can mitigate risks and trade successfully. So download the best-featured app for share trading and start your learning journey.
Since the wireframe missed the point of adding key strategies, the “Benefits” section has been replaced with “Key Strategies” to better meet the intent.