Future and Options are excellent opportunities to grow your money and utilise your technical and analytical skills. It requires you to develop extensive skills and knowledge and predict the market movements precisely.
Therefore, before you begin trading in the future and options stocks, it is imperative to understand all its complexities and nuances to ensure a fruitful trading experience. Read along to find out more.
Understanding Futures and Options
| Futures | Options |
| Futures contracts are agreements to buy or sell an asset at a set price on a set date. | Options contracts give the holder the right, without the obligation, to buy or sell an asset at a set price before the expiration date and time. |
| In this case, both parties (buyer and seller) are obligated to execute the contract on the set date. | In this case, only the buyer has the choice to buy or sell before the expiry. |
The Mechanics of Trading Futures
- A futures trader predicts the market movements and prices of their choice of asset and opts for buying or selling the asset at a future date. This means that a futures contract is at a set price to be executed on a set date in the future.
- The price fluctuations of the underlying assets depend on various factors such as demand and supply, economic conditions, geopolitical events, etc.
- Margin is the initial price of the contract (a certain fraction of the total value of the contract) at the time of purchase. As the expiration date and time come closer, the change in the price of assets will determine the trader’s profit and loss.
- To protect from loss and manage risks, traders can apply multiple strategies like stop loss, hedging, speculation, etc.
The Mechanics of Trading Options
- In options trading the trader has an option whether to execute their contract (buy or sell) on or before the expiry date. The trader in this agreement is not obligated to do so.
- This involves Call and Put options where the call option gives you the right to buy and and the put option gives you the right to sell an asset at a set price.
- Options are priced based on factors like the underlying asset’s price, volatility, time until expiration, and interest rates.
- Therefore, understanding the options is crucial to making successful trades and earning profits. These include information about strike price (the price at which the option can be exercised), expiration date (date until the contract expires), and premium or fee (the price of the option).
Common Strategies for Trading Futures and Options
● Speculation:
One of the most common trading strategies in futures markets is going long or going short. If the trader speculates the price of an asset to increase more than the original price, they may take a long position and if the prices are speculated to go down, they may take a short position. The net difference is settled at the expiry of the contract, resulting in profit or loss.
● Hedging:
This strategy works well for your portfolio when you anticipate that the market will enter a volatile phase. You can protect your assets and losses by buying the opposite position.
● Bear and Bull Calendar Spread:
Another common strategy for futures trading is the bear or bull calendar spread. The bear calendar spread is for long trades, while the bull spread focuses on short trades.
● Protective Put Strategy:
This one is for options trading, where you buy a trade with the aim of holding it for the long term. This strategy helps you hold on to your asset while you also buy a lower put call, which minimises your loss.
● Covered Call Strategy:
This strategy is best applicable in case when you buy a stock call option but it goes for correction later. In such a case, a covered call strategy helps you reduce the cost of holding the stock.
Conclusion
Futures and Options trading can be exciting and help you grow your money. However, as the market constantly changes, you can apply some common trading strategies, such as hedging, speculation, protective put strategy, etc., to reduce risks. After gaining knowledge and understanding the nuances of F&O trading, start your trading journey with a trusted online trading platform.
