Monday, 23 September 2019

Why do most of the traders trade in Futures and Options (F&O)?

Futures & Options (F&O) are leveraged products allowing traders to do ‘more with less’
As a result, profit potential of the trader increases.
Options offer maximum leverage on a given trade with a given corpus of capital, whereas Futures offer lower leverage, comparatively.

For example: a trader with a lac in his trading account has the following three choices of trades for the given scenario (hypothetical)
Scrip: Reliance
Equity share current market price: 1000
F&O lot size: 500
View: bullish i.e. Reliance will go up, let’s say target is 1010
Option 1: Trader can buy a maximum of 100 equity shares at the current rate of 1000/- (100 shares * 1000=100000). If the target is achieved, he will make 1000/- rupees on a lac, i.e 1% on the capital
Option 2: Trader can buy a lot in the futures market by giving Margin (80k-90K, approximately). This gives the trader 500 shares in Reliance with almost same amount in his account. If the target is achieved, the trader will make 5k profit, i.e. 5% gain on the same capital
Option 3: The Trader can buy any Call option, at the given market price, by just giving premium on that option. For example, 1020 CE at 15 rupees. That’s a premium of 7500/- rupees (500*15). The trader can even buy 13 lots equalling to 6500 shares with the given capital. If Reliance goes up, this Call option shall rise considerably, giving much more profit in %terms.
Now, this of course raises the profitability, but at the same time, risk increases considerably. While the safest among these is the equity market, options put the entire capital at risk.
Simply said, more risk, more profit.
Everyone trades according to their risk profile.
In the greed to make more, more risk is taken, like mentioned above, this also puts your capital at risk. So, it is always advisable and wise to trade as per your risk appetite and follow your own risk management rules.

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