Across the world and in India too, F&O represents the hottest-selling stock segment. Traders love the idea of having to pay only a fraction of the stock’s actual price. Once you understand how to mitigate your risk, you could join countless investors who swear by F&O as a rewarding investment option.
What are F&O stocks?
Futures & Options stocks, abbreviated as F&O stocks come under the category of derivatives. This means that they do not have any independent or standalone value, but rather derive their value from the stock price of the chosen stock by a given date. For example, in Futures if a stock is valued at Rs 1000 today and you expect it to be valued at Rs 1200, let’s say by March 2020 for example, you can decide to buy a futures contract (for say 100 shares) on the stock in question for Rs 1000. If the price rises to your anticipated 1200, then you will have made Rs 20,000 on your futures contract. The point is that the sale or purchase as chosen by you will compulsorily take place within the contract period.
When it comes to Options, the fundamentals are the same as Futures except that there is no compulsion to buy (referred to as a call option). Options are the safer but also less profitable option according to seasoned F&O traders.
How do I go about making my first move?
You do not need a demat account to begin trading in F&O stocks. You simply need to open a trading account to park your initial margin with a trusted, well-experienced broker or trading platform, such as Angel One.
What happens to the initial margin? How long is it tied in for?
The initial margin is linked to your F&O contract. Contracts, available on the Angel One F&O Trading platform are usually available for one-month, two-month and three-month periods.
What must I know as a newbie to trading in Futures & Options?
- – Buy early: Beginners often make the mistake of buying derivativestoo close to D-day, or in this case, the day that the results are declared. However, you pay a higher price per share on contracts purchased during this volatile period so it is best to buy earlier, when prices are down. It is advisable to purchase Futures contracts, available on the Angel One F&O Trading platform for at least one month.
- – Contract period: The expiry date for your contract is the last Thursday of the contract month. If you have not closed your position or withdrawn your profits (derivative traders call this Squaring Off) at any time during your contract period, your contract expires naturally and your broker will intimate you about your profits.
- – Keep track of your spends, profits and losses: Tally up your brokerage and government-levied charges such as GST and Stamp Duty against your profits to be sure that you are indeed making profits. Maintain a journal of profits and losses, set targets and know when to pull out.
- – Play safe: You stand to gain large amounts when investing in derivativesbut it is advisable bet small initially because you could also lose the equivalent amount if the stock price does not go in the direction that you had projected.
- – Buyer versus seller: Yash buys and Nisha sells a Futures contract on the Angel OneF&O Trading platform for Rs 9000. When the results are declared, the stock is valued at 10,000. So Yash has made a profit of 1000 per share while Nisha made a loss of Rs 1000 per share. This buyer-seller equation changes drastically in the case of Options where the buyer’s loss is curtailed to the premium amount paid but the seller’s risk exposure is unlimited.
- – Do you have enough chips? During the period of maximum volatility just before the results on stocks are declared, the margins on stocks could rise drastically. You could have bet 10% but today the margins are 30%. Your broker might call upon you to increase your margins – alternatively your number of shares held (or positions) drops in order to accommodate the expanded margins.
- – F&O ban: The Stock Exchange sometimes imposes an F&O ban. It is imperative to not make any F&O moves at this time as you can be penalised up to Rs 100,000 for such a violation.
How can I know whether a broker is legitimate?
A broker must have membership to a stock exchange. For example, Angel One is a Trading and Clearing Member of NSE F&O Segment and BSE Derivatives Segment.
Conclusion: F&O stocks make for a lucrative investment option given you understand the space and have the time and attention-to-detail required to maintain records and watch your positions keenly.