The scope of growth and downfall in the Indian stock market is as sporadic as it can get. It is a complex ecosystem driven by various factors, and professional traders are constantly looking for ways to participate in market movements. The main agenda remains the same, which is making profits. What’s different is that it happens regardless of the market’s direction. In fact, 80% of the traders quit within the first two years due to a lack of knowledge.
Consequently, one particular investment vehicle has gained significant traction in the past few years. A report suggests that futures and options turnover crossed the $1 trillion mark in March 2024. Let’s examine the intricate details of this investment vehicle and its popularity.
Understanding what are futures and options
Though they are investment vehicles, both are unique. They are derivative instruments, which simply means their value is calculated from an underlying asset, such as stocks, commodities, or indices.
Futures: It is basically an agreement to sell or buy an asset on a specified future date, where the price is set beforehand. These are standardised contracts and traded on exchanges. They also offer you a way to prevent yourself from the impact of price fluctuations or examine asset price movements in the future.
Options: Similar to futures contract, an options contract also grants the holder the right to purchase or sell an asset. It is also done at a predetermined price and on a specific date. What’s different is that there’s no obligation. Mainly, they are of types, which call and put options, which confer the right to buy and put options, resulting in the right to sell. Options are utilised for hedging, generating income, and speculative purposes.
Top 4 reasons for the popularity of futures and options
Share trading in India is growing at a rapid place when compared to stock markets of other countries. With its growth, the futures and options stand out as a highly rewarding opportunity. Here’s a brief overview of what makes them a popular investment opportunity in today’s time:
- Hedging against market volatility
One of the primary reasons professional traders flock to futures and options is their ability to hedge against market volatility. As you know, stock markets are subject to fluctuations, which can be due to various factors, such as economic data, geopolitical events, and corporate earnings reports.
Now, in such times, risk management becomes easier with futures and options. For example, if a trader holds a large portfolio of stocks, they can use stock index futures to protect against a potential market downturn. By doing so, they lock in a price for selling their stocks in the future, minimising losses if the market falls.
Likewise, options provide a more flexible way to hedge. By purchasing put options, traders can insure their portfolios against significant declines. If the market drops, the value of the put options increases, offsetting the losses in the underlying assets. This makes options a valuable tool for managing risk without the need to sell off assets.
- Leveraging with limited capital
Another significant advantage of futures and options is the leverage they provide. As a trader, you get to control a large position with a relatively small amount of capital. This feature is particularly appealing in a capital-intensive market like India, where opportunities are abundant, but the cost of participation can be high.
When trading futures, a trader only needs to put down a fraction of the total contract value as a margin. This allows them to take a larger position than they could with the same amount of money in the spot market. For instance, with a margin requirement of 10%, a trader can control ₹10 lakh worth of assets with just ₹1 lakh.
Options also offer significant leverage but with limited risk. They limit the maximum loss to the premium paid, offering a controlled way to leverage a position. This feature allows traders to potentially earn high returns from small price movements in the underlying asset, making options an attractive tool for those with limited capital.
- Profit scope
Futures and options enable traders to profit in both bull and bear markets. They are versatile tools in a trader’s arsenal. In a rising market, traders can buy futures contracts or call options. If the market moves in their favour, the value of these contracts increases, allowing them to sell at a profit.
In a falling market, traders can sell futures contracts or buy put options. If the market declines, the value of these positions rises, enabling traders to profit from the downturn. This dual potential is particularly useful in the Indian market, where economic and political conditions can cause rapid shifts in market sentiment.
- Flexibility and strategic variety
Futures and options offer a wide range of strategies. They can be easily tailored to different market conditions and risk profiles. This flexibility is a key reason why professional traders prefer these instruments. Here are a few strategies given below that are purely for an overview:
- Covered calls and protective puts: Strategies like covered calls and protective puts are popular for traders looking to generate income while holding stocks. A covered call during share trading in India involves selling a call option.
It is done while holding the underlying stock, earning premium income. Conversely, a protective put means buying a put option to protect against potential losses in the underlying stock.
- Straddles and strangles: Strategies like straddles and strangles are effective for traders expecting significant market movement but uncertain about the direction.
When you buy both a call and a put option at the same strike price, it’s called a straddle. Conversely, a strangle involves buying a call and a put at different strike prices. These strategies profit from large price movements, regardless of the direction.
- Spreads: Spreads are another common strategy for share trading in India, where traders simultaneously buy and sell options or futures with different strike prices or expiration dates. They help reduce the cost of trading and limit risk while allowing traders to take advantage of specific market conditions.
Investing in a profitable future
The popularity of futures and options among professional traders in India can be attributed to a combination of factors. The high liquidity, tax efficiency, accessibility, and strong regulatory framework further contribute to their appeal. However, as India’s financial markets continue to evolve, the role of a reliable brokerage platform also comes into play. With their services related to share trading in India, they offer traders a powerful set of tools to manage the market complexities.
Open your account with them hassle-free, within 10 minutes and start trading in financial instruments like futures and options through Ventura today!
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