Both futures & Binary options are derivatives. Their value is derived from the underlying assets like indices, stocks, and commodities.
Futures & Options are employed for two major purposes:
- Hedge against the price risks
- Profit from the fluctuation in prices
Generally, the activity is speculative! By combining futures & options, you can manage your portfolio risks. Futures as standalone contracts are similar to a furious bull, which can leave you in a financial mess. Fortunately, hedgers have a strong base and need not be concerned much, but speculators need to because they can end up losing in futures.
Blending futures & options, you can improve your risk management strategy. Several F&O strategies are available that can help you avoid losses and become a successful online trader.
F&O trading strategies
Long futures contract….Buy Put
Most of the time investors prefer long term positions in the future for getting profits from the rising market. Even though the market has risen historically, it is a rash-decision to assume an un-hedged position. Under this strategy, the trader also trades on the downside risk with an option contract.
You purchased futures for Rs. 5,200 comprising of 100 shares.
- Contract value = 5,200 x 100 = Rs. 520,000
- Initial margin paid = Rs. 52,000
You assumed that the prices will rise, but are also concerned about market falls and losses. The potential of market moving up and down are unlimited, so to curb the loss hedge using Put Options.
Buy Put Option that expires in May at strike price Rs. 5,200.
- Contract premium = Rs. 420 x 100 puts = Rs. 42,000
If price rises to 5,800 points then you get a profit of Rs.600 per put [600 x 100]. It means you earn Rs.60, 000. Thus, your margin gets retained. If prices decline then the maximum loss is the Put contract premium you paid.
If the futures market declines by 5,000 points, you incur a loss of Rs.200 per Put and the overall loss is Rs.20, 000 that can be recovered using Put Options.
Short futures contract…..Buy Call
At times, you feel the market will get bearish. For example, due to high volatility, you go short. You hold a three-month indices futures contract but historically the markets have been bullish, so the penchant to swing in the opposite direction is extremely low. If your speculation is wrong, you can get trapped. Therefore use Call options to hedge the position.
In this strategy, traders buy & sell futures at the same time. The contract prices are the same but the expiration date differs. The price movement is wagered within a narrow range. In the high volatility situation, the losses are massive. Therefore trader hedges the short with a long. He can sell the short contract and invest in long-dated futures.
Currency Trading in India is buying and selling of different currencies in currency pairs on an exchange. The commonly used exchanges for currency trading on the national level are – Multi Commodity Exchange (MCX- SX) National Stock Exchange (NSE). Most of the stock broking companies offering Online Futures Trading also provide currency trading options.