If you wish to diversify your investment portfolio or hedge against potential turmoil in your market, then trading in futures and options is the way forward for you. These financial instruments present many opportunities but are usually found to be complex. This blog will guide you through the basic concept of trading in futures and options and how they work.

Futures and Options Basics

Futures are Options are derivatives that take their value directly from the underlying asset, stocks, commodities, currencies, and indices. Futures are the agreements that enable one trader either to buy or sell the asset at a specified rate on a specified date. Options are the contracts enabling either the right to buy the assets or sell the assets with an agreed rate before reaching a certain date.

Why Trade in Futures and Options?

• Leverage: Control much of an asset with a very small investment.
• Hedging: Protect your portfolio from the wrong way of price movement.
• Speculation: Making profit by taking advantage of the price movement.

How to Trade Futures

• Educate Yourself

  
  Before getting in, it is important to learn how futures contracts work.
  
  Example:
  You may believe that the gold price will rise from its current price of ₹50,000 per 10 grams. You can trade a futures contract to buy gold at the current price even though the price may rise in the future.

• Choose a Reputable Broker

  
  Choose a brokerage firm that offers futures trading.
  Things to Look for:
  - Regulatory compliance
  - Low commissions
  - User-friendly trading platform

• Open a Trading Account

  
  You will have to open a margin account that requires you to place upfront a minimum deposit called initial margin with your broker if you want to take advantage of leverage.

• Market Analysis

  
  Use technical and fundamental analysis to make informed decisions.
  Technical Analysis: Learn charts and patterns.
  Fundamental Analysis: Analyze economic indicators and news events.
  

• Place Your Order

  
  Select the type of futures contract that you would like to enter, and place your order with your broker's trading platform.
  Order Types:
  - Market Order: This order is executed as soon as possible at current market price.
  - Limit Order: This order is executed as soon as the price reaches what you have set.

• Track Your Position

  
  Monitor your trades and make the necessary adjustments.
  - Mark-to-Market: Futures contracts settle every day, and so are gains or losses accredited or debited to your account.

• Closing the Position

  
  You can close your position before the contract expires by entering an opposite trade. For example, if you have bought a futures contract, you sell an identical one to close your position.

Tips for Successful Trading

• Educate Yourself Continuously

  
  Markets are dynamic. Stay updated with market news, trends, and educational resources.

• Develop a Trading Plan

  
  Outline your investment goals, risk tolerance, and strategies.

• Demo Account

  
  There are many online options that offer demo or virtual trading platforms where users can practice without risking the real money.

• Risk management

  
  Stop-Loss order: Automatically sell your position on a predetermined price to limit losing.
  Diversify: Do not invest all your money in only one asset.
  

• Be Conscious of Leverage

  
  Just as leverage can multiply your winning, it can also maximise your loss. Be more careful when using it.
  
  - Leverage Risk: The potential for losses to surpass initial investment in leveraged positions
  - Liquidity Risk: Inability to exit positions in illiquid markets
  - Time Decay in Options: The value of options decreases as the option approaches expiration.

Futures and options trading is a venture with profit-generating and risk-coverage opportunities. If you understand their functionality and follow a well-set discipline, you shall make well-informed decisions suitable to your financial goals. Just begin with a small amount, go on learning, and consult your financial advisor in case of need. Happy trading.

Happy investing!