FUTURE TRADING STRATEGIES TO AVOID

While there’s no doubt that having an effective trading strategy can significantly improve your trading performance, there are also certain points and strategies that you should avoid. Here’re the most important ones:While there’s no doubt that having an effective trading strategy can significantly improve your trading performance, there are also certain points and strategies that you should avoid. Here’re the most important ones:

• Trading highly illiquid markets – The liquidity of the market depends on the number of buyers and sellers at each price level. A highly-liquid financial instrument, such as the EUR/USD pair or stocks of blue-chip companies like Apple, have a large number of market participants ready to jump into the market at almost any price-level around the current market price. This reduces the volatility of the security or currency pair, but also the associated trading risks. Illiquid financial instruments can fluctuate a lot even on small trading orders, which can quickly lead to large losses.
• Scalping strategies – Scalping is a popular short-term trading style that tries to take advantage of very small price movements on very short-term timeframes. Scalping is fast-paced and exciting and attracts many traders, especially those who are just getting started with trading. Unfortunately, those traders often end up with heavy losses. To be consistently profitable with scalping, you’ll need experience, discipline, and nerves of steel. First learn how to trade profitably with longer-term trading styles, such as swing trading and day trading, before getting your feet wet with scalping.
• Holding trades over the weekend – Each time you decide you hold a trade overnight or over the weekend, you can be exposed to unfavorable market events that can lead to losses. This is especially true when holding trades over the weekend.
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HOW DO YOU CREATE AN OPTION STRATEGY?

The options strategy consists of buying one put in hopes of profiting from a decline in the underlying stock/index. But by writing another put with the same expiration, at a lower strike price, you are making a way to offset some of the cost. This winning strategy requires a net cash outlay or net debit at the outset.
WHAT ARE THE DIFFERENT TYPE OF STRATEGIES FOR TRADING IN OPTION ?
There are many options strategies that you will use over the period of time in markets. But, there are roughly three types of strategies for trading in options. Firstly, you have the bullish strategies like bull call spread and bull put spread. Secondly, you have the bearish types of strategy such as bear call spread and bear put spread. Thirdly, there is the neutral options strategy such as Long and Short Straddle, Long and Short Strangle etc. Before you begin reading about options strategies, do open a demat account and trading account to be ready. You may never know when you get an opportunity to try out a winning strategy
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KNOW THE DIFFERENCE BETWEEN FUTURE & OPTION

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A market much bigger than equities is the equity derivatives market in India. Derivatives basically consist of 2 key products in India Options and Futures. The difference between future and options is that while futures are linear, options are not linear. Derivatives mean that they do not have any value of their own but their value is derived from an underlying asset. For example, options and futures on Reliance Industries will be linked to the stock price of Reliance Industries and will derive their value from the same. Options and Futures trading constitute an important part of the Indian equity markets. Let us understand the differences between Options and Futures and how equity futures and the options market form an integral part of the overall equity market

What are Futures and Options?

A Future is a right and an obligation to buy or sell an underlying stock (or other assets) at a predetermined price and deliverable at a predetermined time. Options are a right without an obligation to buy or sell equity or index. A Call Option is a right to buy while a Put Option is a right to sell.

So, how do I benefit from options and futures?

Let us look at futures first. Assume that you want to buy 2850 shares of Tata Motors at a price of Rs.500. That will entail an investment of Rs.14 lac 25 thousand. Alternatively, you can also buy 1 lot (consisting of 2850 shares) of Tata Motors. The advantage is that when you buy futures, you only pay the margin which (let us say) is around 20% of the full value. That means your profits will be five-fold that of when you are invested in equities. But, the losses could also be five-fold and that is the risk of leveraged trades.An Option is a right without an obligation. So, you can buy a Tata Motors 500 Call Option at a price of Rs. 10. Since the lot size is 2850 shares, your maximum loss will be Rs. 28500 only. On the downside, even if Tata Motors goes up to Rs .400, your loss will only be Rs. 28500. On the upside, above Rs. 510 your profits will be unlimited.

How to trade in Options and Futures?

Options and Futures are traded in contracts of 1 month, 2 months and 3 months. All F&O contracts will expire on the last Thursday of the month. Futures will trade at a Futures price which is normally at a premium to the spot price due to the time value. There will only be one Futures price for a stock for one contract. For example, in November 2021, one can trade in December Futures, January Futures and February Futures of Tata Motors. Trading in Options is slightly more complicated as you actually trade the premiums. So, there will be different strikes traded for the same stock for Call Options and for Put Options. So, in the case of Tata Motors, the Call Options premium of 500 call will be Rs. 11 while these Option prices will be progressively lower as your strikes go higher.

Understanding some Options and Futures basics

Futures offer the advantage of trading equities with a margin. But the risks are unlimited on the opposite side irrespective of whether you are long or short on the futures. When it comes to options, the buyer can limit losses to the extent of the premium paid only. Since options are non-linear, they are more amenable to complex Options and Futures strategies. When you buy are sell futures you are required to pay upfront margin and mark-to-market (MTM) margins. When you sell an option also you are required to pay initial margins and MTM margins. However, when you buy options you are only required to pay the premium margins. That is all!

Understanding the quadrants of Options and Futures

When it comes to Futures the periphery is quite simple. If you expect the stock price to go up then you buy Futures on the stock and if you expect the stock price to go down then you sell Futures on the stock or the index. Options will have 4 possibilities. Let us understand each one of them with an Options and Futures trading example. Let us assume that axisbank is currently quoting at Rs. 1000. Let us understand how different traders will use different kinds of options based on their outlook.

How to handle option trading in expiry week ?

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The most common expiry trading strategy used is to buy options with multiple strike prices. This will increase the chance the stock will move in their favor and expire in the money before expiration. Usually, the options premium is very cheap due to time decay.

3 simple rules to follow in expiry week while trading options

1.) Tighten the horizons as much as you can
2.) Avoid carry forward of single long option trade into next session, and
3.) Select slightly in the money strikes especially towards the end of the day

For a bullish view, sell 2 higher strike calls for every call bought. For a bearish view, sell two lower strikes puts for every put bought.Make sure there is at least a difference of two strikes between the ones bought and sold and there is an absolute stop loss mechanism deployed as an exit strategy.

What's the difference between call options and put options?

For the beginner options trader, think of calls as securities that allow you to make a bet that a stock or index price will move UP past a certain level in the near future. And think of put options as securities that allow you to make a bet that a stock or index price will FALL below a certain level in the near future.

WHICH STOCKS TO WATCH FOR TOMORROW?

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METROPOLIS

INDIACEM

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