Futures & options are the form of derivatives. The Derivatives are financial securities that do not have their own value rather they get their value from an ‘underlying’ asset, which is either a currency, a company issued stock, or gold etc. Now, there are two types of the Derivatives. One is exchange traded derivative and another one is over the counter derivative. Exchange traded derivatives are bought and sold through exchanges all across the world like it is done in the stock market. Future and options are nothing but the exchange traded derivatives. Over the counter are not bought and sold through exchanges and they are not standardized as they have different features.
Coming on to the F&O, ‘Future’ means a contract for buying or selling an underlying asset at a given price at a given time. The future price is normally higher than the prevailing market price of the security. Some examples of future contract are equity stocks, indices, commodities and currency. Stock derivatives are normally available till three months in the future. But index derivatives can be bought till three years. Future trade is meant for the people who wish to speculate, leverage, hedge, and arbitrage. One can start trading in Future by trading members of NSE or BSE on their online trading system.
‘Options’ contracts are the instruments that enables the holder to buy or sell the underlying asset at a fixed price. The buyers can look for an option chain which lists the options prices of all of the options for a particular stock. An option can be ‘call’ or ‘put’. In call option, the buyer buys the asset at strike price and can demand sale of the asset from the seller and the seller has to comply. In a ‘put’ option, the buyer can sell the asset at the ‘strike price’ to the buyer and yet again, the buyer can sell and the seller has to buy. The price paid for an option is called the premium. At the start of the contract month, the probability of a share is higher so the premium is normally high. As the expiry date comes close, the premium goes down gradually.
The Stock derivatives are available for up to three months in the future. For example, in the month of November, one can buy stock futures and options for November, December and January. Index derivatives, however, can be bought up to three years in advance. On NSE portal, Nifty future prices are published daily. Futures and options expire on the last Thursday of a month.
Investing in Future & Options needs lesser capital because you have to pay only a margin money and get a larger exposure. Usually F&O is opted by high net worth people. The F&O trading in general needs a lot of time effort and dedication. One can only learn Future and Options trading by actually putting up one’s money. Then only things can make sense to you. But you have to careful in putting your money. The amount of money that you put should be something that you can afford to lose. Put call ratio is yet another predictive tool of analyzing future market.
The most important thing to be kept in mind while trading in Future and Options is that you have to be very conservative as there is always a chance of losing your money fast. So ideally, the amount of money that you can afford to lose should not be more than 15 to 20% of your investible capital. Also, it is recommended for a beginner trader to start with buying options rather than writing or selling them. Once you get sufficient knowledge on how to trade efficiently in Future and Options, then you can go for writing and selling them as well.
Trading in futures & options is quite different from trading in stocks. Where trading in F&O one can do hedging similar to insurance policy for your portfolio. Also, one can speculate but in trading stocks if you feel the market is going down, you can only sell and buy back only for intraday, while in F&O you can run this position up to 3 months.
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