Futures and options trading offers you a way to leverage your investments and tap into potential profits. However, it will initially seem challenging when you start exploring these investment avenues. You may wonder how to get started, what tools you need, and how to manage risks. Simply put, you will need some tried and tested strategies to help you start your F&O online trading without taking much risk.Â
Best Options Trading Strategies
The six best trading strategies for options F&O trading are:
Covered Call Writing
You can use a covered call writing strategy by taking a long position in a stock and trading off call options on that same stock. This helps you to earn extra income from the premiums you collect. It works well in a flat or moderately bullish market where significant price movement is unlikely.
Suppose you have 100 shares of a company priced at ₹500 each. You can trade off a call option with a strike price of ₹550. If the stock price stays below ₹550, you get to keep the premium from selling the option. But if the price goes above ₹550, you’ll need to sell your shares at that price, which could mean missing out on greater profits.
Protective Put
A Protective Put FnO trading strategy serves as a safety net for your stocks. By purchasing a put option, you secure the right to sell your shares at a specific price, called the strike price, before the option expires. This protects you from significant losses while still allowing for potential gains.
For instance, if you own 100 shares of ABC stock, trading at ₹1,000 each. You buy a put option with ₹950 as a strike price for a premium of ₹50 per share. If ABC’s price falls to ₹900, you can sell your shares at ₹950, limiting your loss to ₹100 per share (₹1,000 – ₹950) plus the premium paid.
Straddle Options
A straddle stock options trading strategy is a neutral approach where you buy both a call and a put option for the identical underlying asset, ensuring they have the identical strike price and expiration date. This strategy is ideal if you expect significant price movement but aren’t sure how it will go.Â
For example, if a stock is priced at ₹1,000 and you anticipate volatility after earnings, you could purchase a call and a put option at ₹1,000. If the stock climbs to ₹1,200 or drops to ₹800, you stand to profit as long as the price movement surpasses the total premium costs. This strategy works well in volatile markets.
Vertical Spread
With a vertical spread stock trading options strategy, you buy and sell two options of the same kind, calls or puts, that share the same expiration date but have different strike prices. This strategy allows for either a bullish or bearish stance based on your expectations. For example, if you believe a stock’s price will increase moderately, you could use a bull call spread.Â
As an options trader, if you purchase a put option at ₹150 and sell another at ₹140, your maximum profit is limited to ₹10 minus the net premium paid. This strategy is advantageous as it lowers the overall investment compared to acquiring a single put option.
Iron Condor
The Iron Condor is a sophisticated options trading method aimed at generating profits when the underlying asset experiences low price fluctuations. It requires trading four options contracts—two call options and two put options—with varying strike prices but identical expiration dates.
This F&O trade strategy consists of selling one out-of-the-money (OTM) call and one OTM put while buying a further OTM call and put. The goal is to keep the asset’s price within a specific range until the options expire.
Suppose you anticipate that a stock will trade between ₹200 and ₹220. In this case, you could sell a ₹210 call and a ₹200 put while buying a ₹195 call and a ₹225 put. Your maximum profit occurs if the stock remains within ₹200 and ₹210.
Calendar Spread
A Calendar Spread involves the simultaneous buying and selling of options related to the same underlying asset, but each with different expiration dates. Generally, this strategy requires buying an option with a longer expiration while simultaneously selling one that expires sooner, both at the same strike price.Â
The primary objective is to benefit from the effects of time decay and variations in market volatility. For example, if you anticipate that a stock’s price will remain relatively stable, you could acquire a three-month call option while selling a one-month call option at the identical strike price. As the shorter-duration option experiences time decay more rapidly, there is potential for profit from the disparity in time decay rates.
Best Futures Trading Strategies
The six best trading strategies for futures are:
Trend Following
This approach involves identifying the course of a market trend and executing trades that align with that direction. For example, if you notice that the price of silver futures has been steadily climbing, you would buy (go long) on silver futures through the FnO trading app to benefit from the upward movement. Conversely, if the trend is downward, you would sell (go short) to capitalise on the decline.
Breakout Strategy
A Breakout Futures strategy focuses on identifying and capitalising on price movements that surpass the key support or resistance levels. When the futures contract price breaks through these levels, it suggests the start of a new trend.Â
For example, if you notice that a commodity’s price has continually struggled to breach a specific level (resistance) but then suddenly surges past it with strong volume, this signals a breakout. Here, you may prefer going long, expecting the price to continue climbing.Â
On the other hand, if the price drops below a support level, you may choose to go short, expecting further decline. This strategy depends on momentum and is effective in volatile markets.
Mean Reversion
The idea behind the Mean Reversion Futures strategy is that prices eventually revert to their historical average. You apply this strategy by identifying assets that have moved too far from the mean and anticipating a correction.
For example, if you observe that a commodity’s price has fallen significantly below its usual level, you may purchase futures contracts, expecting the price to return to its average. On the other hand, if the price is far above its typical range, you may sell futures contracts, expecting it to drop. This approach uses statistical methods like moving averages and Bollinger Bands to spot when prices are too high or too low.
Fibonacci Retracement
The Fibonacci Retracement strategy uses Fibonacci ratios to predict possible market reversals. By marking high and low price points, you can plot horizontal lines at Fibonacci levels like 23.6%, 38.2%, and 61.8%.
These levels allow you to predict where a price reversal could occur within a trend. For example, in a strong uptrend, you may wait for the price to pull back to the 38.2% level before placing a long trade, expecting the trend to continue. You can use this strategy to find out the stop-loss levels, entry points, and profit targets.
Moving Average Crossover
In the Moving Average Crossover strategy, you employ two different moving averages to detect trend shifts in futures trading.
In this approach, you observe both a short-term moving average (e.g., 9-day EMA) and a longer-term one (e.g., 21-day EMA). When the short-term average moves above the long-term, it suggests an upward trend, termed a “Golden Cross,” whereas a downward crossover signals a “Death Cross.”
For instance, if you are trading Nifty futures through the FNO app and observe the 9-day EMA moving above the 21-day EMA, it could indicate a good opportunity to go long, expecting a bullish trend.
Volume Analysis
Volume analysis in futures trading focuses on monitoring the number of contracts exchanged to understand the market sentiment and predict price shifts. Rising volume during an uptrend usually indicates strong buyer interest, while declining volume may signal a potential weakening or reversal of the trend.
Suppose you are trading S&P 500 E-mini futures. You notice a notable price surge coupled with high volume. This indicates strong market confidence in the upward trend, leading you to maintain your position. On the other hand, if the price increases with low volume, it may signal uncertainty, making you wary.
Conclusion
Futures and options trading can be attractive if approached with the right knowledge and strategies. By educating yourself on different strategies, choosing to open demat account with a reputed broker like HDFC SKY, building a solid trading plan, and implementing effective risk management techniques, you can set yourself up for success in online trading. Remember that trading is a journey filled with learning opportunities, so stay disciplined and keep refining your skills as you grow as a trader. Happy trading!
