As far as the stock market world is concerned, traders tend to hear a lot about a section that has high-risk and high-reward futures and Options trading. The section of the market, also referred to as the derivatives market, is one of the most widely used trading tools in India today. Professional traders to institutional investors all tend to use futures and options for hedging, speculation, and wealth generation.
In this blog, we will find out what futures and options trading actually is, how it operates, its benefits, drawbacks, strategies, and why one needs to get proper training before venturing into this volatile market. Being a newcomer or one who wishes to hone their skills, going through this till the end will help you learn the topic better and also acquaint you with the right place to learn at the IISMT Institute in Delhi.
What is Future and Option Trading?
Future and Option trading are a part of derivatives trading. Unlike the cash market, where you buy or sell actual shares, derivatives are contracts whose value is derived from an underlying asset, usually stocks, indices, or commodities.
- Futures Contract: An agreement to buy or sell an asset at a fixed price on a future date.
- Options Contract: A contract that gives the buyer the right (but not the obligation) to buy or sell an asset at a specific price within a defined period.
Both futures and options are standardised contracts and are traded on regulated exchanges such as NSE and BSE.
Significance of Futures and Options Trading
The primary cause of Futures and Options trading being so popular is that it provides:
- Hedging: Portfolio protection from market movements.
- Supposition: Profits from prediction market movement.
- Arbitrage: Profits from price differences across markets.
For instance, if you expect that a stock price will go up in the near future, you can purchase a futures contract or a call option rather than acquiring the stock directly. This needs less capital and gives you leverage.
How Future and Option Trading Works
Here’s how it works step by step:
Futures Example: A stock is priced at ₹1,000. You think it will go up to ₹1,100. Instead of purchasing 100 shares for ₹1,00,000, you can buy a futures contract with a margin of, say, ₹20,000. If the stock goes up to ₹1,100, you earn a profit of ₹10,000 on a ₹20,000 margin.
Options Example: If you purchase a call option of ₹50 premium at a strike price of ₹1,000, and the stock goes up to ₹1,100, your gain is ₹50 (spot price minus strike price minus premium). If the stock does not go up, your worst loss is just the premium paid.
Futures and options trading is therefore alluring – the risk and reward pattern is quite different from conventional stock trading.
Futures vs Options: Key Differences
| Feature | Futures | Options |
|---|---|---|
| Obligation | Both buyer and seller are obligated | Buyer has right, seller has obligation |
| Risk | Higher due to unlimited loss potential | Limited for buyer, unlimited for seller |
| Premium | No premium required, margin only | Buyer pays premium upfront |
| Use | Hedging and speculation | Hedging, speculation, and strategies |
Understanding these differences is crucial before entering Futures and Options trading.
Margin and Leverage in F&O
Leverage is one of the largest draws of futures and Options trading. better than putting up the total value of shares, traders put down a percentage (margin). This provides greater exposure with less capital.
However, leverage is a double-edged sword. It will increase profits as well as losses. , risk management is all the more critical.
Popular policies in Futures and Options Trading
Professional traders use strategies to control risks and maximise gains. Some of the most common ones are:
- Protective Put: Buying a put option to protect downside risk.
- Covered Call: Selling a call option against stock held.
- Bull Call Spread: Buying and selling calls with different strike prices.
- Straddle: Buying both call and put to take advantage of high volatility.
- Strangle: Same as straddle, but with varying strike prices.
These strategies render futures and Options trading strong and agile but require practice and expertise.
Advantages of Futures and Options Trading
- Hedging instrument – Remedy against market risk.
- Leverage – Trade large positions with small capital.
- Flexibility – Multiple methods for different market conditions.
- Liquidity – The F&O segment in India is extremely liquid, particularly index options.
- Diversification – Exposing ones assets to different assets like stocks, indices, commodities, and currencies.
Disadvantages and Risks
Future and Option trading are good, but they involve risks too:
- High volatility risk – Prices might go in unexpected directions.
- Leverage risk – A Small error will result in big losses.
- Complexity – Involves sophisticated knowledge of strike prices, premiums, and margins.
- Time decay in options – Options decrease in value as expiry date approaches.
This is the reason why beginners must never venture into futures and Options trading without proper training.
SEBI Regulations in India
In India, futures and options trading are regulated by SEBI (Securities and Exchange Board of India). All contracts are the same, and trading happens on NSE and BSE. Traders have to open a derivatives account with a registered entity under SEBI.
Margins, lot sizes, and expiry dates are pre-set by the exchange for better transparency.
Why Training is Essential in Futures and Options Trading
Most retail traders end up losing money in futures and options trading because of the following:
- They don’t have sufficient knowledge.
- Trade without strategy.
- Neglect risk management.
Educating oneself with the concepts, practicing strategies, and knowing market psychology is a must before venturing in this area. That’s where professional training becomes essential.
Learn Futures and Options Trading at IISMT Institute
Here’s why:
- Expert Faculty: Trainers with years of market experience.
- Practical Learning: Live market training and not theoretical.
- Comprehensive Course: From basics to expert-level F&O strategies.
- Location: near Nirman Vihar Metro Station in Delhi.
- Placement Support: Guiding students to create careers in stock market companies.
You don’t learn theory here at IISMT; you learn by practising in actual markets under guidance. That’s the difference between learning about F&O on the web and becoming a proficient trader.
Conclusion
Futures and options trading is a two-edged sword. If traded with brains and discipline, it can earn significant amounts of money, but it can lead to heavy losses if traded blindly. From hedging and speculation to advanced techniques, futures and options offer traders freedom and choices that cannot be had through traditional stock trading.
But remember, knowledge, strategy, and risk management are not choices. Don’t attempt to do it on your own if you are serious about creating a career in the stock markets. Go to a professional institute where you can learn from professionals and practice under the guidance of real experts.
