Futures are leveraged products that function in both directions. We pay a margin of Rs. 20,000 to purchase equities worth Rs. 100,000 in futures. If the price increases by 10%, our margin profit of Rs. 10,000 will actually be 50% because it is leveraged five times. Similar results apply to losses, which also have the tendency to increase when we trade futures. As long as we are aware that leverage through margins has an effect both in cases of profits and losses, it is acceptable.
Limited risk is associated with buying options, but we rarely make money. Because our risk is constrained to the premium we pay, buying options is a popular choice among small F&O traders. Over 97% of all options expire worthless, which is an issue. That means that if we purchase options, we only have a 4% chance of profiting from them. The fact is that option sellers profit more frequently than option buyers because they take a bigger risk. Don’t, therefore, just let the claim that our risk when purchasing options get the best of us. The truth is that when we purchase options, our chances of profit are likewise constrained.
We might discover that, when trading futures and options, futures are preferable to options for us. Everything depends on our trading style and our ability to sustain a loss.
Options differ in that they are asymmetrical. Let’s use an example to better grasp this. The trade is balanced for both sides if “A” buys RIL futures for Rs. 920 and “B” sells these futures. A and B both make Rs. 20 in profits and losses if the price reaches Rs. 940. If the stock price falls to Rs. 900, the opposite will be true. However, when it comes to options, the buyer’s loss is capped at the premium, but the seller’s loss might theoretically be limitless.
In erratic times, futures margins may increase significantly. Many of us think that futures have an advantage over cash market purchases since margin purchases allow for leverage. But during volatile times, these margins may increase significantly. Assume we paid a margin of 15% to purchase GMR futures. Up to 25% of our liquidity is available for use. However, the stock’s volatility spikes all of a sudden, and the margins are changed to 40%. We’re currently in a pickle! Our broker will forcefully cut our positions until us bring in new margins. When we trade F&O, be mindful of this risk.