“How to do trade in futures and options?” is the challenge many people face when they enter in to stock market. In this article we will share the information that you need to know before you start to trade in futures and options.
What is derivative (futures and options) trading?
Like share trading in the cash segment (buy and sell shares), derivative is another type of trading instrument. They are special contracts whose value is decided from an underlying security.
Futures and Options are two types of derivatives available for the trading in Indian stock markets.
In futures trading, trader takes the buy/sell positions in a stock (i.e. Reliance) or an index (i.e. NIFTY) contract. If, during the course of the contract life, the price moves as expected (falls in case the trade has a sell position or rise in case the trader has a buy position), a trader makes profit. In case the price movement is reverse, traders experience losses.
Fundamental things you should know about F&O trading:
The F&O segment makes for most trading across stock exchanges in India. Futures and Options are the most popular trading instruments globally.
To take the buy/sell position on index/stock futures, traders have to place certain percent of order value as margin. This means if a trader buys future contract worth Rs. 4 lakhs, he only pays around 10% cash to broker (called as margin money) which is Rs. 40,000. This allows trading more with low sum of money.
Profit or losses are calculated every day until contract expires or the trader sells it. Margin money is calculated every single day. So, if there not enough cash in trader’s account, then he has to deposit the margin money to broker or broker can sell his F&O contract and recover the money.
Unlike stocks, derivative has an expiry. This means if a trader doesn’t sell until a pre-decided expiry date, the contract is expired and profit or loss is shared with you by the broker. Futures trading can be done on the indices (Sensex, Nifty etc.). Nifty Futures are among the most traded futures contracts in India.
With futures trading, trader can leverage on trading limit by taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions increases.
Until the contact expires, settlements are done on daily basis. Profits/losses are calculated on end of the day every day.
Demat account is needed for F&O trading. All futures transactions are cash settled. Contract positions are hold by the exchanges until they expire. The F&O positions are carried forward to next day and can be continued till the expiry of the respective contract and squared off any time during the contract life. This is different from ‘Margin Trading’ where trader has to close the position the same day.
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