Futures & Options
Futures and options are the major types of stock derivatives trading in a share market. These are contracts signed by two parties for trading a stock asset at a predetermined price on a later date. Such contracts try to hedge market risks involved in stock market trading by locking in the price beforehand.
Futures and options are financial derivatives that allow traders to speculate on the price movements of an underlying asset without actually owning it.
Hedgers
Such individuals enter into futures and options contracts in the share market to reduce investment volatility concerning price changes.
Speculators
Subsequently, a long position is undertaken by individuals expecting the prices to fall in the future as per their market analysis.
Types of Intraday Trading Strategies
Hedgers - Managing risk in market fluctuations
Hedgers are investors or businesses that use futures and options to protect themselves against unfavorable price movements in an asset. They invest in derivative contracts to minimize the risk associated with volatility. For example, a farmer may use futures contracts to lock in crop prices, or a company reliant on oil may hedge against rising crude prices. By doing so, hedgers aim to stabilize their financial exposure and reduce uncertainty.
Arbitrageurs - Profiting from price differences
Arbitrageurs capitalize on price discrepancies of the same asset in different markets or exchanges. They buy in one market at a lower price and simultaneously sell in another where the price is higher, making a profit from the difference. This strategy requires quick decision-making and an understanding of market inefficiencies. Arbitrage trading in futures and options helps enhance market liquidity and efficiency by narrowing price gaps across different trading platforms.
Speculators - Taking advantage of market movements
Speculators invest in F&O contracts with the sole objective of profiting from price movements. They do not own the underlying asset but take positions based on expected price changes. If their market prediction is correct, they can make significant returns, but incorrect speculation can lead to substantial losses. Due to the high risk involved, speculation is best suited for experienced traders who can analyse trends and manage risk effectively.
Retail and institutional investors - Leveraging market opportunities
Both retail and institutional investors participate in futures and options trading for various reasons. Institutional investors, such as hedge funds and mutual funds, use derivatives to manage portfolio risks and optimize returns. Retail investors, on the other hand, often trade F&O for short-term gains or hedging purposes. However, due to leverage and potential volatility, retail traders should approach F&O with caution and proper risk management strategies.
Futures and options trading can be rewarding but is complex and requires a strong understanding of the market. Investors should assess their financial goals, risk appetite, and trading expertise before entering the derivatives market
