This blog is all about Options Trading and how to get started with options trading. It will also introduce you to beginner options trading strategies you can use to profit from up and down volatility in the equities market.
This article will discuss the beginner’s guide to futures & options. Suppose you don’t have any prior knowledge about features & options but have a keen interest in knowing about them.
In that case, you can keep reading the article, and by the end of the article, you will learn about the basics of features & options. But in the very article, we will mainly be focusing on Options, and we will talk over features in some other articles.
Futures & Options V/s Equity
There are certain segments of stock markets where stocks are traded. In every segment, stocks are traded in a whole different way. Of them, Equity is the most popular way out there. Equity is the oldest among these segments, and it is comparatively easy to understand among all these segments.
Equity is the direct shareholding of a company, which means that if you hold the Equity of stock, you are the company’s direct shareholder. Equity is by far the most known segment, as said, and if we talk about the shareholding of a company, we do mean the equity shareholding.
Futures & Options
But there are other segments in the market other than Equity. Options are one of them. After hearing the word Options, the next immediate word that appears in a trader’s mind is Futures. Indeed, Futures & options are very co-related words and are often spelled together. The working principle behind both features & options is almost the same, which is – derivative.
In fact, features & options trading is done in the derivative market. So the concept & the principle of the derivative is very much involved in futures & options. So to understand features & options, we will need to understand the story of derivatives at the very beginning.
From the definition, the derivative is a type of contact. Derivative contract derives its value from any underlying asset – it is the most used sentence to tech derivate. Let’s start with what futures & options are with a practical example –
What is Contact?
Suppose you want to purchase 5 grams of Gold today. As of today (10th May 2022), the current price of Gold is 60.57 dollars per gram. But you are assuming that the price of Gold may decrease in the future.
So if you buy 5 grams of Gold today, you will be at a loss in the near future, according to your calculations. That’s why you go to any jewelry shop, but the shop owner thinks differently from you. He believes that the price of gold will increase in the future.
So you two make a mutual contact with each other. The point of contact is that whatever the price of Gold is, you will buy 5 grams of Gold on 1st June at today’s current rate (i.e., 60.57 dollars per gram).
Carefully try to understand the case – 2 scenarios can happen in this case.
- The price of gold can either go up.
- Or, it can go down from today’s rate.
If the price goes up, let’s say – that on the day of 1st June, the rate is 61.57 dollars per gram; in that case, you will still be able to buy 5 grams of gold @60.57 dollars, according to the contact made with the jeweler. So this will result in a profit of 5 dollars due to the contract.
But in the other case, if the price of gold goes down, let’s the day – that one on the contract execution date the rate goes down by 1 dollar per gram, then you will have to pay today’s rate though the price has gone down. In this case, you will incur a loss of 5 dollars. So that’s how contacts are made.
In futures & options also we make these types of contact. But here everything is done online. Now, to trade in futures & options you will need to have a few things. First of all, you will need to –
Open A Trading Account
In the article on the stock market beginner guide, we guided you on how you can open a stockbroking account in the equity segment. Unlike equity, the futures & options segment is not that easy. Hence, the process of opening a broking account is a bit complicated here. To open an F&O account you will need to have proper proof of your income.
Some of the questions that you have to submit while filling up that proof of income include-
Your Investment Objects-
Options trading is risky, and if you do have the amount of money needed for options trading, you may be questioned why you are going into this field instead of simply investing it?
Your Trading Experience-
People who are good at technical analysis and have prolonged trading experience should only opt for options trading. If you have very little understanding of the market but still want to do options trading, it’s purely by chance that you can earn money from it.
It rarely happens that a person absolutely novice in options has made consistent money from it. That’s why you will need to provide your past trading experience.
Your Financial Stats-
With all that previous information, you will also need to clarify some of your important financial states, such as – the amount of cash you have in your hand, your annual income, your net worth, etc.
Your brokers will analyze your answers to those mentioned above & other questions and will suggest to you what extent of risk you should go for. Remember that the first & foremost criteria for trading in futures and options are to have a large capital.
Here is the list of some well-known brokers with whom you can open your options trading
About Robinhood & Webull
Robinhood & Webull are both popular options trading brokerage apps & are used by many users to take trade-in options. There are some great features of both these platforms. These are –
- No trading fees while buying or selling an option contract.
- No minimum account balance.
But unlike trading apps, in many options trading apps, you have to keep a minimum balance to take trades. The minimum balance is higher than what you need if you had only equity segments enabled in your broking app.
Options Trading Process
While it is tough to tell the process of options trading in some words, here we write just the basics of options trading.
Types of Options
- Call options
- Put options
Call options are taken when you assume that the stock price may go up. So if you are observing a positive momentum in any stock, you can go and purchase the call option of stock.
Put options are taken when you are assuming that the stock price may eventually go down. If there is a bearish trend in the market and you believe that the price of a certain stock may go down in the future, you can take the put options.
What to Do If You Observe a Sideways Momentum in the Market:
Sideways momentum is a momentum when the stock price neither goes up nor goes down. When the stock trades at almost the same price for days, it is that situation. In that case, you should neither buy a call option nor a put option. If you have already bought any call or put options, you should sell them to avoid bigger losses in the future.
That’s all about futures and options from this post. Futures and options is a very large topic, and honestly, it cannot be described in just one article. Even the basics of futures and options are so big that it needs a complete book to describe all the processes and the techniques of futures and options.
We have not only limited this article to only options. However, we have tried our best to describe the absolute basics of futures and options. We have discussed the basics like – the concept of derivatives in F&O, Put Options & Call Options, and the necessary steps to follow to open a trading account to trade options – to help you understand options properly.
Again, we are saying that futures and options are pretty riskier than normal equity markets. So if you do not have prior & a proper experience in trading, you should first observe the market and then enter into the futures and options segment.
Futures and options are more of a game of technical analyzing skills than fundamental analysis skills. As options trading is done for a shorter amount of time, you should depend on the technical analysis of any stocks.