Futures and Options (F&O trading) are financial instruments widely traded in stock markets by beginners and experienced traders alike. These derivatives allow speculation on price movements of underlying assets like stocks, currencies, and commodities. This guide explores futures and options trading, their differences, advantages, and key concepts.
Table of Contents
What is Futures Trading?
Futures are derivative contracts obligating buyers to purchase (or sellers to deliver) an asset at a predetermined price on a future date. Assets include stocks, commodities (gold, silver), or currencies.
Key Features of Futures Trading
- Binding Contract: Both parties must fulfill the agreement.
- Leverage: Higher leverage than traditional stock trading (e.g., 20:1).
- Liquidity: High market liquidity enables easy position adjustments.
Lot Size in Futures Trading
The smallest tradable unit is called a lot size. For example:
- BANKNIFTY: 1 lot = 15 shares
- NIFTY: 1 lot = 50 shares
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What is Options Trading?
Options provide the right (but not obligation) to buy/sell an asset at a fixed price before expiration. Unlike futures, options traders aren’t compelled to execute contracts.
Types of Options
- Call Option: Right to buy at the strike price (bullish strategy).
- Put Option: Right to sell at the strike price (bearish strategy).
Key Terms
- Strike Price: Pre-agreed asset price.
- Premium: Cost to purchase the option.
- In/Out of the Money: Determines intrinsic value.
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Difference Between Futures & Options Trading
| Aspect | Futures | Options |
|---------------------|--------------------------------------|--------------------------------------|
| Risk | Higher risk (unlimited losses) | Limited risk (loss capped at premium)|
| Obligation | Mandatory execution | Optional execution |
| Upfront Cost | No premium (margin required) | Premium paid upfront |
FAQs
Q1. Is options trading risky?
Ans: Risk varies with strategy. Proper hedging (e.g., protective puts) can mitigate losses.
Q2. How long can I hold futures?
Ans: Until expiry (typically monthly contracts).
Q3. Is F&O trading suitable for beginners?
Ans: Requires market knowledge. Start with paper trading or small positions.
Q4. What are the most traded futures contracts?
Ans: BANKNIFTY, NIFTY, RELIANCE, and HDFCBANK top the list.
Q5. Can futures trading hedge investments?
Ans: Yes! Farmers often use commodity futures to lock in crop prices.
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Disclaimer: Trading involves risk. Consult a financial advisor before investing.
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