Derivative Trading Simplified.

Top Benefits of availing MarginPlus are?

• Zero cash margin requirement for Intraday trades across all segments, no interest charged.
• No need to maintain 50% cash margin in F&O (Lowest in the industry starting @10.95% p
• Avail upto 100% cash margin funding for cash delivery orders starting @ 0.045% per day.
• Real time activation of MarginPlus while placing orders across segments.
• Increase your ROI on short term trades with the help of funding.

What is Futures and Options Trading?

Derivatives trading is a big thing in the stock market today. Future and options are also derivatives of stock trading using a contract and at a later date. Trade futures contracts deal in stock through a contract executed between two parties wherein the stock's price is predetermined. Similarly, options trading is also a method of making a contractual deal on selling stock later at a fixed price.

However, there is one fundamental difference between futures and options trading. While a trade futures contract must necessarily be executed at the stipulated date (meaning that the sale must happen towards the purchaser), in options trading, the buyer has the right but is not obligated to buy the agreed trade derivative. It would appear that options trading is a tad safer than futures trading, with the buyer retaining the right to reject the trade if stock prices are not favourable on the date of the contract.

Futures and Options trading is, more often than not, utilized as an effective method of hedging by market professionals. Deciding the derivative price beforehand and executing a contract helps them seal the sale price if the stock price does not seem to be rising.

With that said, this mode of trading comes with its risks. When a futures and options trader assumes a position on a stock and deals a contract on that value, the price is sealed – if the stock sways opposite, the traders stand to shoulder massive losses.

Who Should Invest in Futures and Options ?

Futures and options trading isn't for everyone since it requires deep knowledge of the stock market dynamics and an intuitive idea of where a stock price would go in the next few months or days. There are three kinds of professionals who typically participate in f&o trading. Let us see who they are.

• Hedgers

Hedging is a trading strategy that aims at reducing the underlying risk in the financial derivatives being traded. By limiting the volatility in stock prices by trading f&o, hedgers can make profits when the conditions of their stock are not favourable. However, when the price of the concerned stock increases during the contract period, hedgers who deal in futures are likely to incur heavy losses. Here, those who trade in options may save their investment by not going through with the purchase.

• Speculators

These professionals buy and sell their futures options based on a forecasted stock price pattern. Speculators keenly observe stock behaviour on the market and predict a rise or fall. If a stock is predicted to rise, speculators purchase it at a lower price to sell it later when the value is higher, and vice versa.

• Arbitrageurs

These professionals work on the big picture of future option trading. By dealing in high volumes, arbitrageurs attempt to offset the profits and losses in f&o trading to a positive difference and consequently cash in on risk-free profits. These professionals have a keen eye for trading and benefit from the market's inefficiencies.

Advantages of Futures and Options Trading

Trading in futures and options exposes investors to highly lucrative market environments that work in multiplied profits based on the decided margin. Professionals who wish to reduce the risks associated with market volatility are the ones who engage in futures and options trading; however, someone wishing to gain more exposure in this market can also plunge in at his own risk. Futures and options do present a very chance of high returns. However, for the unversed, the losses are high too.

Advantages of Futures Trading

• Based on the stock price moving in the predicted direction, a futures contract holder can profit in direct multiples of the decided margin with the futures broker depending on future and options in share market.
• Price fluctuation is not very drastic, owing to the high volume of futures floating in the market, making these investments very liquid.
• With futures trading, brokers charge very low commissions and brokerage.

Advantages of Options Trading

• Options trading is cost-efficient. Compared to buying stock directly, the investor can get more leverage and higher volume when trading in the same stock options if he selects the right call.
• Options have lesser risk than futures, given that it is not compulsory to go through with the purchase in case prices are not favourable.
• Options have a higher percentage return on investment than trading stock directly, which appeals to many seasoned investors.
• Options provide investors with alternatives to achieve investment goals by ways other than direct trading, which accelerates profits.

Types of Futures and Options

• Stock Futures: Derivative contracts from underlying stock are called stock futures.
• Index Futures: Futures contracts trading on an entire market index are index futures.
• Currency Futures: Futures contracts that trade currencies against each other are currency futures.
• Interest Rate Futures: Futures trading on debt instruments are called commodity futures.
• Commodity Futures: Trades in future options based on agricultural, metals, and others are commodity futures.

Types of Options

Options are basically of two types: Call and Put. Let's understand them in detail.

• Call Option

An options contract has a strike price that must be traded when the stipulated date arrives. A call option gives the buyer the right to buy the underlying asset at the terms of the contract signed. However, the buyer is not obligated to go through with the purchase.

• Put Option

Put options are in stark contrast to call options. These options give the seller the right but not the obligation to sell the option at the strike price in the contract.