The derivative segment is the biggest contributor to daily turnover in the Indian stock market. Futures and options (F&O) are derivative products. They’re called derivatives because their value comes from an underlying asset, like shares or commodities. In a derivatives contract, two people agree to buy or sell the base object on a specific date at a certain price. When it comes to the stock market, this set date is called the exit date. The goal of this kind of contract is to protect against market risks by setting a future date for the price of an object.
There is a deal to buy or sell a stock or other object at a specific price on a certain date. This is called a future contract. An options deal, on the other hand, gives the owner the opportunity, but not the obligation, to buy or sell assets at a specific price on a particular date, which is called the expiry date. Let’s understand in detail how to trade in futures and options.
More about F&O
It’s essential to understand how to trade in futures and options and what is F&O trading in depth before you start learning about how futures and options work. One way to trade is in options, which are a type of derivative. Offers to buy or sell stock could be written on them, but they only show who owns the investments they’re based on once the deal is final.
Options contracts usually cost more than they’re worth, and each one represents one hundred shares of the underlying product. The strike price of an asset is shown by its premiums. This is the price at which you can buy or sell the asset until the contract ends. The date on this page specifies when the contract expires.
Futures and Options: Understanding the differences
Traders often use futures and options, which are both financial instruments to make money or protect themselves against changes in the prices of commodities and other similar investments. Let us understand the main difference between futures and options. A future is a contract to buy or sell an underlying asset like a stock or commodity at a pre-determined price on a date specified in the contract.
On the other hand, options trading allows one to make a forecast regarding fluctuations in the value of the underlying instrument such as stocks without actually owning stocks. High potential returns and low margin requirement have made options trading immensely popular in India despite being highly risky. Traders often employ this strategy to make money from fluctuations in the price of a specific stock or index.
How to trade in F&O
Options and futures trading gives traders the opportunity to make handsome profits notwithstanding the risks involved. You can start investing in F&O by following some of the guidelines mentioned below. Here’s a detailed guide on how to trade in futures and options.
- To start trading and learn how to trade futures and options, the first thing you need to do is open an account with a stock broker such as Lemonn that lets you buy and sell futures and options products.
- Go to the site or app and join once your account is opened. You can also choose the mobile app option and browse the different F&O choices.
- Once you’ve chosen the stock broker, select the contract.
- When you’re sure about your choice, place your order. You can buy futures and options at the strike price. When an option contract owner exercises a call option, the underlying security is purchased at that price. When an option contract owner exercises a put option, the underlying security is sold at that price. If you think prices will go up, you buy a Call Option and sell a Put Option. If you believe prices will go down, you do the opposite.
- The spot price is an essential part of negotiating the price of the futures contract. There is a present market price for everything, including money and goods. The spot price helps you decide whether to buy or sell the product right now. It is also used as a starting point for understanding the cost of future contracts.
What is expiry in a futures contract?
In a futures contract, the expiry date is the day that the contract ends. After this date, the contract is over, and either the actual object is delivered physically, or the terms of the agreement are met through cash payment. Understanding what is F&O trading and its expiry date is essential for futures traders because it impacts many areas, such as contract payment and rollover tactics. When it comes to the end date of futures contracts, here are some essential things to keep in mind:
- Details of the contract
Each future contract has its specifics such as the expiration date, contract size, ticket size, and method of payment. To trade futures successfully, you need to understand these parameters.
- The expiration date for monthly futures
Futures contracts usually expire once a month, and each one does so on a different day of the month. Traders need to be aware of these dates to manage their accounts properly.
- Roll over the account
Traders can roll over their accounts by ending the contract that is about to expire and start a new one with a later expiration date if they want to keep their exposure to an asset after the current contract’s expiration date.
How to trade F&O on Lemonn
Futures and Options (F&O) trading involves contracts where people agree to buy or sell assets at a set price on a future date. This lets investors speculate about price changes without actually owning the asset. Traders can choose to go long (buy) or short (sell) based on what they expect from the market. Read more about it here.
Here’s how to trade in futures and options on Lemonn, the latest entrant in the Indian stock broking space. Futures and options let you control more with less money and profit on price swings in both directions.
- Discover, analyze, trade with Lemonn
If you are new to F&O trading, Lemonn will handhold you in each step of your journey. For instance, you can analyze trends, identify trading opportunities, and execute trades. The Lemonn app helps you discover top-performing index and stock options based on trading volume to make informed investment decisions.
- Know about the market and pick a trade plan
Understanding the market and the tools before starting to trade in F&O on Lemonn is essential. Due to the high level of risk involved, it is also necessary to fully understand the terms and ideas used in futures and options investing. To reduce risks and make the most money, one should also have a sound investing plan. Finding the opening and end spots, setting stop-loss orders, and figuring out the risk-reward ratio are all part of a trade plan.
- Placing an order
After devising a trade plan, the next step is to place an order. When you trade F&O on Lemonn, you can either buy or sell contracts. You can place an order as a market order or a limit order. Traders use a limit order to specify at what price they want to buy or sell a contract. When you place a market order, on the other hand, it is filled at the current market price.
- Keep an eye on the deal and close the position
Once a seller places an order, they have to keep an eye on it and see how the market moves. Traders should always keep an eye on the market and have a plan for when to get out of the trade. You can close the trade by either making a counter order or letting the contract run out.
- Leverage
With Lemonn, you can control large positions with a small amount of capital, and amplify your profit potential.
- Speculation
F&O is all about speculation. With Lemonn, you can manage risks effectively by using Options to hedge against volatility and limit potential losses.
Things to keep in mind
Generally, people who want to trade F&O need to know how trades in this market segment are different from trades in the spot market. If you want to understand how to trade in futures and options better, here are a few things you should know before you start:
- Make a plan for trade
Carefully plan your trades before you open a position. This means having both a profit goal and a way to get out of the trade if things go wrong. The goal is to make it less likely that you’ll have to make significant choices when your money is already at risk in the market. Fear and greed can make you hold on to a lost position for too long or get out of a profitable situation too soon. You don’t want these feelings to control your decisions.
- Importance of liquidity
Traders who don’t know how to invest in futures and options need to realize how vital liquidity is. So, make sure you avoid making the same mistake. In addition to studying effective strategies for trading options and futures, you should check that the derivatives you’re dealing with have sufficient liquidity to allow for a smooth exit.
- Out of money
Before you start trading options, you need to know this significant fact. Options that are “out of the money” or “OTM” may be cheaper, but they often can’t be cashed in quickly enough. In other words, an affordable choice isn’t always the best chance. It’s essential to find a good mix between cost, making money, and having cash on hand.
- You can use F&O selling as a way to protect yourself
When you trade futures and options, you take on certain risks. This is why it’s always a good idea for new traders to use both a regular trade and a futures or options trade. The futures or options trade can be used as a backup for the regular trade. This way, there is less danger, and you can learn more about how the derivatives market works.
Conclusion
Investors who want to grow and spread out their money should know how to trade in futures and options. But it’s important to know when your F&O contract expires and how that can affect your investments if you want those investments to do well. Since the expiration date of F&O can cause stock prices to change, it can also impact your share assets.
You should track the underlying assets and expiry days of every F&O contract you are considering. By being aware, you can lower your risks, take advantage of opportunities, and keep control of your financial plans.
