Futures and options involve more than just trading and hedging; they also include simple and mixed strategies. Strategies using futures and options are essential in the world of financial derivatives. These F&O strategies offer various ways to trade safely and effectively. Let’s explore some of the top strategies for the futures and then shift to the best options strategy. Here is a guide on F&O trading strategies for better results.
Strategies for Futures
Following are the four strategies for futures trading. These futures strategies provide investors with options suited to different market expectations and conditions.
Going Long
In the Going Long strategy, investors buy a futures contract with the expectation that its price will increase before it expires. This speculative approach aims to profit from a bullish market, offering a leveraged return on the expected rise in the price of the underlying asset.
Going Short
Going Short involves selling a futures contract, expecting the contract price to decrease before the expiration date. This speculative strategy seeks profits from a bearish market, providing a leveraged return on the expected fall in the underlying asset’s price.
Bull Calendar Spread
The Bull Calendar Spread is a more sophisticated strategy that includes buying and selling futures contracts on the same asset with different expiration dates. Traders typically go long on near-month futures and short on mid or far-month futures, aiming for a widening spread in favour of the long contract.
Bear Calendar Spread
The Bear Calendar Spread involves going short on near-month futures and long on mid or far-month futures. Similar to the Bull Calendar Spread, this strategy focuses on spread dynamics, seeking a widening spread in favour of the long contract.
Trading with these strategies is possible if your investment platforms offer the necessary support. You can explore the following strategies on the best trading app in India, which provides essential derivatives trading tools and indicators. Let’s now look at some strategies for options trading.
Strategies for Options
Here are some popular and frequently used options strategies.
Protective Put Strategy
The Protective Put strategy is used when you’ve invested in a stock for the long term, but concerns arise due to potential downside risks from recent news. Here, temporary price corrections are expected. So, you have to keep faith in the stock for the long run. For this, the Protective Put strategy offers a solution.
Instead of exiting the stock, you retain your cash market positions while concurrently acquiring a lower put option, granting you the right to sell. This approach ensures that your maximum loss is restricted by the put option, providing a safety net for your long-term investment.
Covered Call Strategy
If you bought a stock and it goes down later, you might want to consider the Covered Call strategy to make the most of it. This strategy isn’t risk-free, but it can help lower the cost of holding the stock. Instead of doing nothing when the stock isn’t performing well, you can sell higher call options using this strategy. This way, you earn a premium, which helps offset the cost of holding the stock. It’s a way to be proactive with your investment rather than just watching the stock value drop without taking any action.
Collar Option Strategy
The Collar strategy combines protective put and the covered call. In the covered call strategy, there’s a risk if the stock goes down. But the Collar helps with that. It does two main things. First, it stops the downside risk of a covered call. Second, it lowers the cost of the put option by selling a higher call option. Here, you first buy the stock. Then, you get a lower put option. Lastly, you sell a higher call option. Also, remember, doing all these steps costs some money.
Straddle Option Strategy
In Straddle, you buy two options at the same strike prices and with the same ending date. You can either go for a long straddle or a short straddle. Going long means you buy a call and a put option at the same strike and end date. On the other hand, going short means selling a call and a put option at the same strike and end date. Now, going long pays off when the stock goes way up or way down because it thrives on big changes. Just remember, going long means dealing with two premiums instead of one.
Conclusion
Choosing the most suitable strategies for futures and options trading involves a careful assessment of your trading goals, risk tolerance, and current market conditions. Through exploration and experimentation with different strategies, you can find an approach that aligns with your needs and facilitates the accomplishment of your investment objectives. For trading in the share market, you can open best demat account with a reputable brokerage firm like Kotak Securities.