Recommended before reading this section:
Derivative Trading in India – Forward and Future Contracts
Call Option | Put Option – Option Trading Basics
Over the last few years, domestic stock markets have witnessed an increased interest in the Futures & Options (F&O) segment.
There are lots of reasons for this increased interest in option trading in India.
Primarily, lack of returns in the cash segment due to a prolonged economic slowdown has driven away many stock market participants.
Many others have taken to option trading because it requires less capital (since it provides higher leverage.
i.e. you can put a small margin amount of the whole transaction value to take a trading position).Further, it is possible to make profits by betting on the directional movement of a stock or the market as a whole unlike the cash market where you typically buy and hold the stock until it appreciates.
The biggest argument in favor of option trading is the fact that when employed effectively, option trading strategies will help the investor make risk free profits.
However, while option strategies are easy to understand, they have their own disadvantages.
[Part 1 of 2] (pdf) UNUSUAL OPTIONS ACTIVITY TRADE EXAMPLE - $KEYS EARNINGS TRADE
Most importantly, unlike buying in the cash market (i.e. equity segment) where you can hold on to the underlying purchase for as long as you would like, in case of F&O market, you are time bound.
In other words, you must exit your trades at a certain time in future, and you may be forced to incur a loss.
Nevertheless, it is important to understand how these strategies work. Keep in mind that the strategies below are not exhaustive and there are endless possibilities of making money in the stock markets by employing a combination of strategies in the cash, futures and options markets, by entering into simultaneous trades.
For this reason, derivatives markets around the world have always attracted the brightest and sharpest minds.
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