Futures and options (F&O) are defined as standardised contracts which can be traded on the exchanges freely by the traders. A trader buys or sells the underlying asset for a particular price at a predetermined date. In futures and options trading, a promise is made by one party to transfer an asset to the buyer of the future at a particular price and at a particular date.
According to investopedia: “An option gives the buyer the right, but not the obligation, to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder’s position is closed prior to expiration.”
Trading in futures and options or derivatives market is almost same as that in the stock market’s cash segment.
Research thoroughly: The trading strategies need to be different from that of stock market. Kotak Securities explains through an example: “You may wish you buy stocks that are likely to rise in the future. In this case, you conduct a buy transaction. In the derivatives market, this would need you to enter into a sell transaction.”
Margin amount: Always keep required margin amount for derivatives trading in store. The stock market rules require you to continuously maintain a margin amount i.e. you cannot withdraw this amount from trading account at any point in time till the trade gets settled.
Keep eye on budget: A trader must select the stocks and their contracts on the basis of the these four things: Amount in hand; Margin requirements; Price of the underlying shares; Price of the contracts.
You do have to pay a small amount to purchase the contract. Kotak Securities advises: “You can wait until the contract is scheduled to expiry to settle the trade. In such a case, you can pay the whole amount outstanding, or you can enter into an opposing trade. For example, you placed a ‘buy trade’ for Infosys futures at Rs 3,000 a week before expiry. To exit the trade before, you can place a ‘sell trade’ future contract. If this amount is higher than Rs 3,000, you book profits. If not, you will make losses.”