Futures and options trading in India: A beginner’s guide

Starting your journey in the world of financial markets might be overwhelming for you because of the array of investment options available. Among these, futures and options (F&O) trading stands out as a fascinating yet often misunderstood by beginners. 

Many investors shy away from F&O, viewing it as a complex investment avenue. But here’s the truth: while F&O trading does require careful study, it’s not impossible to grasp the concept. In today’s article, we will decode the concept of futures and options trading for beginners.

Let’s get started!

Understanding futures and options trading

In the stock market, futures and options are derivative products since they are derived from an underlying asset such as stocks or commodities. In a derivative contract, two parties enter into an agreement to buy or sell the underlying asset on a predetermined date and price. In futures and options, this date is known as the expiry date. 

The main purpose of entering a futures contract is to hedge against market volatility and risks. By locking the price of the underlying asset for a predetermined date, an investor hedges the market. In such a contract, while one party anticipates the price to increase, the other party expects the price to fall. This leads to one party making a profit and the other party making a loss. 

In simple terms, a derivative is a financial instrument that does not carry a value of its own. Rather, the derivatives act as an indicator of the price of the underlying asset.

Also read: How to invest in stocks? A beginner’s guide to stock investments

What is call and put in option trading?

In an options contract, a buyer has the right but not the obligation to buy or sell the underlying at the predetermined price (strike price) before or on the expiry date. If you want to trade stocks without actually owning them, then options are a preferred choice among many.  

In options trading, call and put options are two types of options with different functionalities. A call option allows the buyer to sell a particular stock at the fixed price in the option contract. The buyer has the right but not the obligation and may exercise the option if the price rises. 

A put option, on the other hand, allows the buyer to sell a particular stock at a predetermined price. If the price of the underlying stock falls, the buyer has the right to exercise the option. The seller or the writer needs to buy the stock at the predetermined price from the buyer. Put options may also take place when investors believe the stock price will rise.  

Also read: Behavioural Finance: Understanding the Psychology of Trading Success

What are futures contracts?

A futures contract is an agreement between two parties to buy or sell an underlying asset at a set price on a predetermined date. This asset can be stocks, commodities like crude oil or gold, or currency pairs. In a futures contract, the buyer needs to settle or pay to enter the contract. Here, the buyer is obligated to buy or sell the asset at a set price before or on the fixed date or expiry date. 

Futures contracts may vary depending on the underlying asset, such as commodity futures, index futures, financial futures, and currency futures. 

F&O tax news

After the Budget 2024, the new F&O trading tax of STT on the option sale in securities increased from 0.0625% to 0.1% of the option premium. In the case of selling futures in securities, the tax bracket has increased from 0.0125% to 0.02% of the traded price of the futures. 

How to do futures and options trading?

Futures and options trading for beginners can be a challenging thing to navigate in the stock market. Here are the steps to keep in mind if you are considering futures and options trading. 

1. Open a Trading Account

Your journey begins with opening a trading account through a reputable broker registered with the BSE or NSE. You can use Dhanush to open your free account as well. This account will be your gateway to the F&O market.

Also read: Full-Service vs. Discount Brokers in India

2. Access Your Trading Platform

Once your account is set up, log into your chosen platform. Most brokers offer both web-based interfaces and mobile applications, allowing you to trade on the go. With Dhanush, you can also access the platform through your desktop.

3. Research Available Options

Take time to explore the various F&O instruments available. Understanding the market and different contract types is crucial before making any investment decisions.

4. Place Your Order

After selecting your preferred F&O contract, it’s time to place an order. You’ll be trading at the “strike price”—the predetermined price at which the underlying asset can be bought or sold.

5. Understand Spot Prices

Keep a close eye on the spot price—the current market price of the underlying asset. This plays a vital role in determining futures contract pricing and can significantly impact your trading strategy.

Once you’ve purchased an options contract, there are three potential outcomes:

• You can sell the contract before expiry to close your position. This may result in either a profit or loss, depending on market movements.

• For call options, this means buying the underlying asset at the strike price when it’s trading higher in the market. For put options, it’s selling the asset at the strike price when it’s trading lower.

• If market conditions aren’t favourable, your contract may expire worthless. This occurs when the underlying asset’s price doesn’t move as anticipated.

Remember, F&O trading involves complex financial instruments and carries inherent risks. It’s essential to thoroughly educate yourself and consider seeking professional advice before entering this market. With proper understanding and careful strategy, F&O trading can be a powerful tool in your investment arsenal.

Difference between futures and options with example

Aspect	Futures	Options
Obligation vs. right	Must complete the transaction to enter the contract	Can choose whether to exercise
Risk Profile	Potential for unlimited loss	The buyer’s premium is the maximum loss that can occur.
Upfront Costs	Require margin deposits	Require premium payment

Conclusion 

Futures and options trading can be daunting for many. However, while futures and options may carry potential rewards, they also come with certain risks. It is always advisable to do proper research before investing in futures and options.