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Futures and options are both derivatives, meaning that they
derive their value from underlying assets. In simple terms, futures are
derivative financial contracts that make it obligatory for the parties involved
to transact an asset at a predetermined price on a predetermined future date.
Options, on the other hand, do not come with any such obligation. Instead, they
give the buyer of the option the choice to transact an asset at a predetermined
price on a predetermined future date.
Don’t lose track of the key elements of the trade
Before
you enter into a trade, make sure you get the structure right. More
specifically, you need to keep the strike price, the premium and the expiry in
mind. Ensure that the premium you’re paying is within your budget, and is generally
not way above the likely profits that the trade may bring in. The expiry is
important too. Near-month expiry may be more expensive, while far-month expiry
means less liquidity. Keep this in mind, so you can strike the right balance.
Use FnO trading as a hedging mechanism
Options
trading and futures trading offer a lot of leverage.This is one of the key
reasons many traders gravitate towards FnO trading. You can make use of the FnO
market as a hedging mechanism too. For instance, if you hold stocks of a particular company, you can
hedge your position by purchasing at-the-money put options. So, if the stock
price rises, you need not exercise the option. If it falls, your options
contract can hedge your spot market position.
Make use of profit targets and stop losses
Another
excellent way to profit from FnO trading is to make use of stop losses and
profit targets. Stop losses keep your losses from going below a certain point,
and they can prove to be very useful if the market moves differently compared
to what you expected. Profit targets, on the other hand, enable you to exit
your position when you’re in the green zone. Getting too greedy and waiting to
make more gains could turn out to be detrimental if the market falls.
