Tips for a beginner in F&O trading

Predicting the future is by no means an easy job. It requires considerable erudition, creativity, and wisdom. In the capital markets, investors try to gaze into the future by trading in derivatives (read: futures & options).

Since its launch in June 2000 on the National Stock Exchange (NSE), the risky yet rewarding form of trading has gained fast popularity in India. At present, more than 30 lakh contracts valued at almost Rs 50,000 crore are traded on the NSE every single day.

Here is a layman's guide to trading in the world of F&Os, risks associated with them and precautions a first-time investor must take.

Derivatives are products that obtain their value from a spot price, called the underlying. In India, are the two popular derivatives instruments traded on stock exchange. While in a futures contract, you agree to buy or sell shares at a certain price in the future, the option contract gives you the right, but not an obligation, to buy (through a call option) or sell (through a put option) the underlying scrip at a specified date and at a specified price.

To start trading in futures contract, you are required to place a certain percentage of the total contract as margin money. This feature of futures contract makes it a leveraged instrument since you can make a larger profit (or loss) with a comparatively small amount of capital. In India, futures contracts are available on equity stocks, indices, commodities and currency.

In , you pay the premium for buying the rights toexercise your option. To take the buy or sell position on index and stockoptions, you are required to place a certain percentage of order value asmargin money. An option can be a call option or a put option. A call option gives youa right to buy the asset at a given price or before a given future date. Thisgiven price is called strike price. Similarly, a put option gives you a rightto sell the asset.