By DK AgrawalTrading in futures and options (F-O) can be approached in two ways.
First, you can look at F-O trading as a proxy to cash market trading, or you can say it can be used as hedging tool.
In the second way, you can trade by paying a margin. Trading in stock futures is by no means an easy job as it requires one to predict the future movement.
Thus, it requires considerable knowledge, vision, and perception.
However, one can make money from stock futures even when the market is declining (short selling). It’s not like traditional stock market investing where you make money only when your stock price is on the rise. Before venturing into the unknown waters of F-O trading, one needs to fully understand the implications arising out of such trades.
Unlike the cash market, where your risk is limited to the amount of money you deploy, the loss can be much more than what you have put in F-Os, as market volatility and the value higher contract sizes can erode massive capital even in one wrong trade.
Remember, there is no way you can have any control over future events. So, before one gets into futures trading, it is essential to know your risk appetite.
You should know how much money you can afford to lose.
Additionally, emotions and discipline also play a big role in F-O trading.
One should not panic, if a trade starts going in opposite direction as one wrong decision and indiscipline in a panic situation can result in heavy losses. Additionally, one should not trade too much and take exposure only when the conviction is high with a proper strategy in place.
From brokerage or cost point of view as well, futures trading has less charges compared with delivery-based stock buying in cash market as future contracts can be carried over with no additional cost.
You don’t need to pay any additional brokerage when you carry forward a position, you only need to meet the marked-to-market obligations, if there is any. Another big disadvantage of futures trading is that you cannot partially close the position and you need to square it off compulsory on the date of expiry. So, if you want to dabble in F-O trading, you need to keep all above points in mind, know the risks and your risk appetite well and must have proper discipline.