Derivatives are fundamentally based on futures and options methods, and there are numerous F&O trading strategies that one can employ in a secure and productive manner.Futures and options involve trading and hedging, as well as straightforward and hybrid strategies.
It’s important to keep in mind that trading in derivatives, including the F&O (future and options) segment, may be risky and should only be attempted by seasoned investors who have done their own research and understand the risks involved.
In light of this, let’s discuss some of the most appreciated F&O strategies.
Table of Contents
Covered Call Strategy
The buyer of a call option is granted the right to acquire the underlying asset at a fixed price (the strike price) on or before the option’s expiration date. A covered call strategy is a well-liked method of trading options in which the investor holds long positions in several stocks or other assets and sells (writes) call options on those same assets in order to profit from the premium earned.
Covered calls provide investors with three potential benefits:
- Profits in a neutral to bullish market
- A selling price over the ongoing stock price in rising business sectors
- A small amount of downside protection.
Long Straddle Strategy
The Long Straddle is an options trading technique that entails purchasing a call option and a put option on the same underlying asset with the same expiration date and strike price.
Because the investor is “straddling” the market and betting that the price of the underlying asset will move significantly either way, the strategy is known as a “straddle.”
The first benefit of this strategy is that a straddle has closer breakeven marks than an equivalent strangle does. Second, if a straddle is held until expiration, there is a lower chance that the full cost will be lost. Third, compared to long strangles, long straddles are less susceptible to time decay.
Short Straddle Strategy
A short straddle is an options strategy in which the same strike price and expiration date are used to sell both a call option and a put option. When a trader thinks the underlying asset won’t move noticeably higher or lower during the course of the options contracts, they adopt this strategy. One benefit of a short straddle is that it has a higher premium and maximum profit potential than a strangle (one call and one put).
Bull Call Spread Strategy
This technique bets that the stock will rise, but only up to a specific extent, by purchasing a call option at a lower strike price and selling it at a higher one on the same stock. By using this tactic, both possible gains and losses are constrained. Investors that are positive on the underlying asset but want to keep their losses to a minimum might use the bull call spread method.
It is important to keep in mind that the approach requires a thorough evaluation of the risks involved. These include the possibility that the price of the underlying asset may decline instead of rising as anticipated and the expiration of the options.
Bear Put Spread Strategy
A bear put spread is a type of option strategy in which an investor or trader hopes to lower the cost of holding an options trade. He anticipates a moderate to substantial decline in the price of a security or asset. By purchasing put options and selling the same number of puts on the same asset with the same expiration date but a lower strike price, you can create a bear put spread.
The primary benefit of a bear put spread is that the net risk of the exchange is decreased. The cost of purchasing the put option with a higher strike price can be offset by selling the put option with a lower strike price.
Futures and options trading can be a lucrative investment option for individuals seeking high returns. It is, however, crucial to understand the different types of futures and options, develop effective trading strategies, and manage risk to maximize returns.
With the advent of advanced platforms like an online trading app, trading in futures and options has become more accessible. With excellent apps such as the Kotak Stock Trading App, your smartphone becomes a dynamic trading platform. You can trade in real time, watch the share market live, and get detailed research on the Indian stock market.
Nonetheless, traders should exercise patience, discipline, and good timing to succeed in this market. In conclusion, futures and options trading can be rewarding, but traders must exercise due diligence and caution.