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How to trade in Futures and Options? The ultimate guide

Derivatives have no inherent value. They rather derive their value from an underlying asset. These assets can be anything from Debt to Equities toSecurities to Currencies to Indices toCommodities. There are two significant derivatives: Futures & Options. The only difference between the two is that Options give you the right but not the obligation to carry out the agreement. UnderFutures, you enter a deal and need to honour it. 

How to trade in them?

While Futures provides an opportunity to deliver the underlying asset, most people use them for speculating or hedging. However, to trade, speculate, or hedge, you must understand how Future and Option Trading works. Once you gain clarity, you need to select a trading platform and open a Trading Account. You can also avail of a broker’s service where you place orders online or via phone. 

Besides, focus on the followingessential steps before trading with these Derivatives:

Objective

Every time you decide to invest a large sum of money, you should know what you want to achieve. Would you secure your investment portfolio by hedging in the derivatives market? Do you want to undertake risk, earn profits, and make strong bets (speculating)? Do you wish to utilise low-risk market imperfections by buying in one market and selling it at a higher price in the other one (arbitraging)? Ask these questions before trading. 

Type of derivative

Once the objective is clear, decide whether you want to trade Futures, Swaps, Options, or Forwards. 

Risk-reward payoff

Thisis the reward you earn for every rupee you risk. While making the trade, consider the ratio to compare the expected investment returns and decide if the rewards are worth the risk. 

Consider premium and margin amounts

Derivatives Futures and Options require you to pay premiums and margin amounts. The premium depends on the underlying asset’s price, volatility, and expiry, among other factors. Meanwhile, the margin amount is a deposit before you initiate trading, and you cannot withdraw them until the trade gets settled. These fees can affect your returns, so you need to be mindful while trading. 

Formulate a strategy

With some knowledge of Futures and Options Trading, curate a plan. While formulating the strategies, be aware of how much cash you have handy, the margin requirements, how much premium to pay, the derivative price, and its underlying asset. 

You could stay invested until the contract expiry date, i.e.,the last Thursday of every month or settle the contract before expiry and make a profit. 

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. – ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai – 400025, India, Tel No : 022 – 2288 2460, 022 – 2288 2470. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730) and BSE Ltd (Member Code :103) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Mr. Anoop Goyal, Contact number: 022-40701000, E-mail address: [email protected]. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Composite Corporate Agent License No.CA0113, AMFI Regn. No.: ARN-0845. PFRDA registration numbers:  POP no -05092018. We are distributors of Insurance and Mutual funds, Corporate Fixed Deposits, NCDs, PMS and AIF products. We act as a Syndicate, Sub -syndicate member for IPO, FPO. Please note that Mutual Fund Investments are subject to market risks, read the scheme related documents carefully before investing for full understanding and detail. . ICICI Securities Ltd. acts as a referral agent to ICICI Bank Ltd., ICICI Home Finance Company Limited  and various other banks / NBFC for personal finance, housing related services etc. & the loan facility is subjective to fulfilment of eligibility criteria, terms and conditions etc. NPS is a defined contribution plan and the benefits would depend upon the amounts of contributions invested and the investment growth up to the point of exit from NPS. Insurance is the subject matter of solicitation. ICICI Securities Ltd. does not underwrite the risk or act as an insurer. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

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