In India, we still see derivatives trading as a toxic one. But the truth is, It’s the easiest trading you can do to make money. A proper understanding of derivatives is important before jumping into trading. If you like to get the understanding of how capital market works, then you should definitely know about derivates and f&o. Let’s dive into it and understand how derivatives works and how can you make profit by avoiding risks.
Derivatives
Derivatives is nothing but the security, which price is decided by the underlying asset. In stock market, you can easily buy any stock of the company or derivative. There are two forms in derivates, Options And Futures. f&o trading can be done in any indices.
What are Future Trading?
future trading is a contract between buyer and seller that will be happening in a future date at an agreed price. For example, If the stock of the company price is Rs.100, you cannot buy the share of the company. In cash market, you can buy as much as shares as you want. But here in futures market, you can buy only lots. One lot can have many shares. It depends on the organization to sell specific number of shares in a lot. So, if you buy one lot that has 1000 shares, then you are getting into one futures contract. If the expiry date is the end of the month. To buy 1 lot you need 1 lakh of money. In futures market, if you invest 1 lakh, you will get the profit of 1 lakh. It is more profitable and also little risky if you are a buyer or seller.
And if the price of the share decreased to Rs.50, then also you will be losing lot of money. So, you have to do risk analysis and make the profit as such. Future market prices vary very much based on the underlying asset. You can also square off the futures contract by booking the profit even in the next day also. This can be done based on the present value of the contract.
What are Options trading?
In options trading, buyer can buy or sell the shares at certain price at any time. Two options are available here: Call option, Put option. Call option is to buy the share and Put option is to sell the shares at specific price. If the share is been sold on the expiry date, then it is called strike price.
Let us look into an example, In call options, you can buy a lot of a company. Assume the share price of the company will go Rs.100 on expiry date of the contract. And you bought 1 lot of 1000 shares, then you make a profit of Rs. 1lakh on the expiry date of the contract. So, if the share price increases, you can make a profit with call option.
Put option is highly profitable when the share price goes down. Let us take the same example, if the company share price goes down by rs.50 on expiry date. For buyer Rs.50000 loss. But in put option, the seller gains Rs.50000
In derivates, you can gain a lot and also lose a lot. You should be aware of the risks and also if you understand the derivate market well, then you can invest in f&o stocks. There are lot of techniques to avoid risk. You should understand how can you make use of it and earn more.