3 easy steps to trade in F & O

Imagine that you are watching a cricket match between India and Australia where Virat Kohli is batting at 98 and 4 runs are needed to win. You predict that the next ball is going to be a six and it happens as you imagined it to be. There a sense of happiness excites you.

Same is the case with stock market where you determine the prices to rise or fall and take your decision accordingly. But is it as easy as predicting a cricket game? Well, the clear answer is a no but the stock market continue to provide various products through which it becomes fairly helpful to hedge or mitigate the risk of investments. Such products are the derivative products and one popular example are the future and options derivatives.

What are Derivatives and How Future and Options linked with it?

Suppose you have a key to a locker which holds 10,000 rupees. Will you be willing to pay the same amount to buy the key or a few pennies less? Definitely yes, because you derive the same amount from the locker. Here, the key words as a derivative. Derivatives are basically the securities who have no value of their own and whose value is derived from an underlying asset.

The underlying instruments could include bonds, commodities, market indexes and stocks. The derivatives take place through the organised exchange as well as over the counter but we won’t dive into the markets and understand what exactly the future and options linked with.

Future and Options are most popular derivatives which are traded on the exchange market. Let us break down the two:

Future: A future stock option allows you to purchase and sale a stock at a pre-determined price for delivery on a later date. Assume that a company F (whose stock is listed on F&O segment) will release results of stock price on Friday. You (as a buyer) expects the price to rise from Rs. 50 to Rs. 60 and therefore, buys a future contract on F at Rs. 50. The company release the results and the price rise and thus, you gain profit of Rs. 10 on each share. On the other hand, you might also suffer a loss if the price falls.

Options:The stock option gives a right to an investor, and not the obligation, to buy or sell a stock agreed upon the price. Primarily, there lies two types of options: put and call. The call option gives the right to the buyer to buy the underlying asset at a predetermined price known as the strike price. Having a call option gives you the right to demand the sale of the asset from the seller while seller only has the obligation. The buyer though has to pay a premium price to the seller for the same. In the other case of put option, the holder has the right to sell an asset, at a specified price by a specified date to the writer of the put.

Easy & safe steps to trade in F & O

Future and Options seems fascinating but the confusion lies as to how to trade in this market, so here are a few quickies to help you through:

Step 1: Buy the Equity Share
The first step to have an account with the stock broker in the F & O segment, assuming that you already have an account. One can visit the website of NSE or BSE to check for available future contracts for indexes as well as securities. You can individually check through a discount broker or hire a full service broker to recommend you the best trade. It’s a calculated gamble after all. Some important fields to know here are:
• Exchange segment = NFO (NSE F & O Segment)
• Inst Name (Instrument Name) = FUTIDX (Future Index)
• Symbol = NIFT
• Expiry = Date

Step 2: Hold Equity Future
The equity future contact stays with you till the time you sell it or it expire on the predefined expiry date. Each day, you receive a future and option day bill along with few statements (including margin statement), client ledger, etc. from the broker.

Step 3: Sell Equity Future
When you see and analyse the perfect opportunity to make the sell before the predetermined date, you sell your stake.

How to trade well?

Remember the times when you had to buy a chocolate but didn’t know that it will result to food poisoning and bought it. The future and option could result in the same way if you do not take precautions to tread slowly and cautiously before investing. Here are you tricks to keep in mind:

• It is essential to know your risk appetite, as to how much you can lose than earn.
• Emotions and discipline play on you, don’t let them panic you while the situation is uncomfortable, that panic might result into a loss, so make sure you analyse it properly with the help of stock screener.
• You have no control over future events, so you can’t be over confident of your decisions.
• One doesn’t need to pay additional brokerage while you carry forward a position.
• Squaring off is compulsory on the date of the expiry .

Conclusion

It is fair to say that being a risky market than the normal trading, future and options comes with its huge margin of profits if traded well. But be sure to have the right financial advice before you invest in a hurried manner in any luck of profit. Be the lion to trade and take the jump only when required, being in a herd won’t fulfil your motives.

Focus on your trade management, trade structure and use this derivative as a hedge more than the trade. These are the basic advices but if you want to swim this ocean, you must keep reading and consulting to be aware of the market situation to trade and fare well in this race of trading.