Futures and options combine trading and hedging with straightforward and hybrid techniques. Derivatives are fundamentally based on futures and options trading tactics, and numerous profitable and safe F&O trading strategies are available. Keep reading the article to learn about the futures and options strategies.
About Futures and Options
There are two types of futures and options in use: hedging and speculation. For producers, traders and investors, prices can be volatile and may lead to losses. So, in order to mitigate such volatility, these derivatives might be helpful. Speculative traders use derivatives to profit from price movements. They can make money by trading such derivatives if they are able to predict price movements precisely.
Futures are contracts giving a holder the right to purchase or sell an asset on a given future date at a fixed price. The option provides the right, but not the obligation, to buy or sell a particular asset at a specified price on a selected date. This is the main difference between futures and options.
Future Trading Strategies
Traders of futures trade in two ways: a long buy and a short sell. The four most popular futures trading strategies are as follows.
- Long Trades
A common form of trading futures is longer trades. You are confident that the price of your underlying asset will increase before its expiry date when you purchase futures. You can benefit extra if the price rises above the amount you and the seller agreed upon (the strike price).
- Bear Calendar Spread
The spread of the bear calendar is opposite to the spread of the bull calendar. Using this approach, a trader uses short positions on short-term contracts and long positions on long-term contracts in futures trading. The investors who favour this strategy believe that the spread will narrow in favour of short positions to increase their profits.
- Short Trades
Short transactions are the sale of futures. When you sell a futures contract, you can be sure that the underlying asset’s price will drop before the contract expires. Short trades are generally considered more risky than long ones because losses may be substantial if the price changes.
- Bull Calendar Spread
In this futures trading strategy, traders buy and sell futures contracts on a single underlying asset but for different expirations. The trader usually goes long on the near-term expiry and short on the long-term expiry. To increase their profit margin, investors who adopt this strategy expect the spread to widen in favour of a more extended period.
Option Trading Strategies
The most commonly used options trading strategies of traders are listed below.
- Covered Call Strategy
You’re buying an underlying asset in the spot market and selling a call on it as part of this options trading strategy. Investors who maintain a neutral stance towards the bull will adopt this approach. The reward is modest, but the losses may be limitless about the risk-reward ratio. Furthermore, a trader who relies on this strategy to make money may need help to cope with the volatility.
- Buy Call
One of the most popular investment instruments in options is long calls. If you are confident that the underlying asset and the corresponding strike price will increase before the expiry of the contract, you may place this trade. Keep in mind that time is the enemy of choice. The quicker the underlying asset’s price moves over the strike price, the more profit you can make. However, you may be liable to a loss if the price increases on the expiry of the contract.
- Buy Put
You expect the underlying asset to decline, either in the future or before the expiry of the contract, when you buy a put. You’ll make a profit if the underlying asset drops below the strike price. Your premium value, or the amount you paid to purchase the put, could disappear if the asset’s value rises.
- Married Put Strategy
This approach involves the purchase of a put option by the investor for the shares they plan to purchase or currently own. This strategy is adopted by investors who are generally positive on stocks so that the impact of falling prices can be minimized.
Conclusion
Lastly, it is necessary to thoroughly evaluate your trading objectives, risk tolerance, and market conditions to choose the best strategies for futures or options trading. By learning and experimenting with different strategies, you can discover a strategy that matches your needs and helps you attain your investment targets. For futures and options trading and demat apps, check out the Kotak Securities app.
Singh is an experienced spiritual writer and the resident author at Guruvanee.com. With a deep passion for exploring the mystical aspects of life, Singh delves into various spiritual traditions, philosophies, and practices to inspire readers on their spiritual journeys.