Futures & Options Trading – The Expert Tips You May Not Be Aware Of
When it comes to trading in the stock or equity market, most people are quite comfortable. You can purchase and sell shares as you like and hold them securely in your demat account. You can conduct your trades online or through your investment brokers. But when it comes to commodity trade options, all the rules and regulations are different. You need to know about things like options and futures, which are way more complex than equity investments. As such, before you begin trading in options and futures, you should have all the necessary information you need. Here are a few expert tips you may not be aware of.
Things you should know about future and option trading
Most investors generally believe that there is an advantage to trading in futures as compared to cash market buying, since you can easily leverage your investment by purchasing futures on margins. However, one of the most important things to known about dealing in futures is that its margins can increase sharply when the market is volatile. Let’s look at this with the help of an example. Let’s assume you purchased ABC futures by paying a margin of approximately 15%. You wish to liquefy your investment when you reach 25%. But the stock suddenly becomes volatile and your new margins are now revised to 42%. This situation can have you perplexed, wherein you either need to ask your broker to cut your position mandatorily or bring in new, fresh margins. As such, you should consider this risk during .futures and options trading
Any investment expert will tell you that buying options comes with limited risks. But the downside of this is that you hardly ever make money if you take small risks. Generally, when you trade in futures and options, you are limiting your risk to the premium you pay. The basic issue here is that an incredibly high number of options generally expire worthless and if you buy options, you stand an extremely low chance of making profits. On the other hand, you can make a higher profit as an option seller, because the risks involved are higher there; ‘high risk, high returns’. So if someone tells you that you are limiting your risk by buying options, remember that your chances of making profits are also limited while dealing with options.
While trading in futures and options, you must always remember the importance of stop loss and profit targets. Whether you are buying or selling, you must keep this in mind. Remember that when you conduct your options and futures trades, you have to think as a trader, not an investor. As such, your focus should be on protecting your capital. This can only be done if you clearly define your profit and loss trade; for every trade conducted. No matter what you think of the stock, you must have the discipline to adhere to stop loss levels and your profit booking levels religiously, while conducting your options and futures trades.
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