Things that you should know before investing in futures and options

Before you invest in futures and options you must know that your losses would not be limited to margin money. In the case of spot market trades your losses would be limited to the money that you are investing over there. However, in the case of the FnO (future and option) markets, you would be paying margins that are a lot less than the capital that you are actually investing. This can make it easier for you to lose sight of the magnitude of the money that you have actually lost. So, it is important that before you invest in the market. 

It is quite convenient to neglect the factor of liquidity 

A lot of traders who happen to be new to the world of future and option trading tend to neglect the aspect of liquidity that is so important in these cases. This is why you have to make sure that you are not making the same mistake as well. Yes, it is indeed important in these cases to get the investment strategy right. However, it is just as – if not more – to make sure that you are choosing derivatives with a high level of liquidity. This will make sure that you can exit the market as and when you need to.

It is important to look at the moneyness of the option 

This is one factor that you have to know specifically before you get into options trading. OTM (out-of-the-money) options may be a lot more economical. However, they have a major disadvantage. They are not sufficiently liquid. This is why do not be swayed by an option that is not priced too high. You have to be smart in this case and get the ideal balance between affordability and liquidity & profitability.

Trading in FnO carries unique risks just like all the other forms of investment out there. However, you can be sure that if you invest through 5paisa your risks would be a lot lower. One of the things that you can do in this case – especially when you are a beginner – is to carry out an option trading strategy or a future trading strategy with a normal trade. This way, your FnO trade would act as a hedge for the regular trade. Thus, you would be minimizing your risk and also get an idea of the way the derivative market functions. Apart from this, you should also have the best trading strategies in these cases. 

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Created on Feb 8th 2022 07:50. Viewed 349 times.

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