Many traders in futures and options begin with decent profits only to end up with a string of losses. Mounting losses even erode their trading capital and they just can’t seem to find their feet afterwards. A trader in futures and options must know certain basic future and options trading tips to be successful over the long haul.
What is futures and options trading?
Making sense of how futures and options are similar and different from each other helps while investing in the F&O segment.
Futures and options belong to the derivatives category. This means that their value is based on an underlying asset be it a stock, index or commodity.
Futures are contracts that facilitate purchase / sale of an underlying commodity at a pre-determined price at a future date. When you buy a stock / index future, you have bought a stock with a commitment to pay at a future date. It’s the reverse if you sell a stock / index future.
Types of options and related risks
There are two types of options - call option and put option - with both following a similar pattern as far as gain / loss is concerned.
How to be more successful at futures and options trading
There are many traders who will tell you about the enormous sums of money they made from futures and options trading.
But one can also lose a lot of money, at times even more than the investment amount in a relatively short period. Even veterans can misjudge an opportunity and lose money. Hence the need to proceed with caution and make the most of futures trading tips.
Listed here are the leading mistakes made by traders, with options trading tips on how you can trade smarter. Reviewing them carefully can help prevent costly mistakes and make your trading activity a lot more profitable
This is avoidable even though it’s a preferred strategy for many traders. While profits can multiply in futures trading, losses can also mount. Leveraging can work for you, but it can also work against you.
Risk can be curtailed effectively with the stop/loss feature - a key futures trading tip. As leverage is a double-edged sword that can hurt and help, you must keep a strict stop/loss target while trading. On clocking the set profit, use the feature to exit the futures position.
Options derive their value from two components - time value and intrinsic value.
An option which is going to expire at zero will see a sharp fall in its price as expiry nears. A useful options trading tip is to set your target return and exit at the right opportunity.
It is natural for traders to prefer cheaper priced options as there is a low premium to pay. An important options trading tip is to check the intrinsic value of an option and buy it only if it is under-priced.
Trading in futures and options can be immensely rewarding but with significant risk - which is true for any form of trading. If you consider the points listed in the article and avoid the pitfalls in particular, there is no reason why you cannot become an expert trader in futures and options.