How to play fno?
If you are just starting out and want to know how to do future and option trading, here is a guide to things you must know before trading in F&O to help make your F&O journey easier.
Unlike stocks, which can be directly traded on the stock market, derivatives are those instruments that lack a present value. They indicate the underlying asset’s price, and you can place your opinion on its future price. Trading in derivative products like Futures and Options is like speculating on the value of pre-existing instruments (e.g., Gold, stocks, bonds).
Also Read: What is Futures and Options?
Although both are derivative products, there is a fundamental difference between Futures and Options. Futures are an obligation for both the buyer and seller, where they have to trade at a pre-established value of the underlying asset. In contrast, Options are not obligations, but a right of the buyer, where they can trade at a pre-established price of the underlying security.
To simplify this further, when the buyer enters into a futures contract with the seller, they forge an agreement to buy and sell the asset respectively at a specified time in the future at a particular price. Thus, the buyer has an obligation to buy the assets as per the agreement. It can be thought of as a commitment that must be fulfilled and squared off at the specified date.
With an options contract, the buyer agrees to buy the asset only at a fixed price, but is not obligated to do so. It is an option buyer’s right to exercise or not exercise the contract.
For instance, if any transportation company wants to avoid bearing an unexpected fuel price rise, they can buy futures contracts. A seller can sell these contracts to protect themselves against an unexpected fuel price fall. Here these parties are hedgers or real companies, and fuel is their business base. They agree on the price and quantity of fuel and delivery date.
Before we dive deep into how to trade in f&o and understand how the F&O process works, let’s understand some of the commonly used terms in in the derivatives market:
To begin trading in F&O, you can follow the following process.
Step 1: The primary step to begin trading and understanding how to trade in futures and options is to create a trading account with a broker where you can buy and sell Futures & Options contracts. These contracts are bought via BSE or NSE registered broking firms.
Step 2: Once your account is created, you have to log on to the portal. You can also choose the mobile application option and browse through the various F&O options available.
Step 3: After picking a platform do some research on which futures and options are available and what suits you better.
Step 4: After finalising your choice, put in the order details, and now you can buy the futures and options at the strike price. It is the price at which a call (option contract owner buys the underlying security at this price) or put option (option contract owner sells the underlying security at this price) is exercised. You buy a Call Option or sell a Put Option if you predict the prices to rise, and vice versa if you predict the price to go down.
Step 5: A vital factor that helped negotiate the Futures contract’s price is the spot price. Any asset, like currency or commodity, has a current market price. This is the spot price, which helps in the immediate buy or sell of the commodity, and is the base indicator for the Future contract’s pricing.
Now that you have bought an Options contract, there are three outcomes to it to help you take the next step.
The Indian stock exchange has provided a fixed expiry date for F&O contracts. You aren’t bound for contract fulfilment for the Options contract, and it will expire after the fixed date. However, for the Futures contracts, you are bound for contract fulfilment on the expiration date. The last working Thursday of a month is the expiration date for both Futures and Options. So, the final step is to fulfil the terms of the contracts.
Here’s how you can begin trading in F&O:
Step 1: Login to your account on Groww.
Step 2: Click on ‘F&O’ from the list of options available below the ‘top gainers’.
Step 3: Now you will be able to see ‘Option chains’ – which will take you to all the available contracts.
Futures and options contracts include contracts such as index options, stocks options, index future and stock futures as well.
Step 4: Choose as per your preference. In this tutorial, we have selected the Nifty 50 option chain.
Step 5: Once you click on Nifty 50, you should be able to see all the available contracts with their strike price, call price and put price.
You can similarly access this data for any other security or index by typing its name in the search option above.
Step 6: Click on your preferred call option and a screen like the one below will open up:
Step 7: Scroll down for more information like Market Depth which displays buy orders and sell orders and so on. You will also see the options of ‘Buy’ and ‘Sell’ which will allow you to make your F&O order.
Note: You can also access F&O by directly clicking on the stocks or index from the login screen. Here’s how:
Step 1: Login to your Groww account.
Step 2: Click on the contracts you want to see on the search bar. (For example, Nifty 50)
Step 3: Click on ‘View Option Chain’ and you will be able to see the call price, strike price, put price and other related information on your screen.
Now that you are aware of the F&O trading process, here are a few things to be mindful of:
- Use F&O more as hedge than as a trade. This is the basic philosophy of how to trade in futures and options.
- Get the trade structure right; strike, premium, expiry, risk.
- Focus on trade management; stop loss, profit targets.
There are approximately 275 stockbrokers in India. They all claim to provide you the best platform. If you are new to trading and want to start trading, how will you decide which one to register with?
The first thing you need to know is that trading app is not just about trading. There is much more you can and should do on the app. Trading apps are also about charting, learning, finding trading ideas, market data, and news. Not all stock trading app provides these features but most do. As a trader, you have to look for a platform that provides the above features and also good customer support and low brokerage charge.
If you are completely new to the fascinating world of stocks and for some reason inclined to trading, you better prepare yourself and then start trading. You need to have a basic understanding of stocks, how the exchange works, what factors govern the market, and the price of the individual stock. You need to understand the difference between investing and trading and have a clear mindset, whether you want to be a trader or investor.
Once you are ready, you need to come up with an approach or strategy to start trading. Trading is less about learning but more about executing your learning because when actual money comes into the picture, it comes with an emotional factor and you can only learn controlling of emotions with time and experience.
We have earlier compared some popular trading platforms and in this article, we are going to talk about one more trading platform – FnO Play.
FnO is an innovative trading platform with a focus on risk management so that users can take on the capital markets with confidence. FnO provides a fair chance to you to trade with managed risks with a portfolio of products suited to your trading experience. It has a curated list of multiple investment options in stocks, currency pairs, and indices which lets you invest and trade in different instruments based on your risk appetite and trading preferences. They are a member of NSE and registered with SEBI. You can access the platform only through the app – FnO Play.
Build-in Risk Management – They provide a risk management system that offers a unique book profit and the stop-loss mechanism that actively manages your trading risks. With FnO you will never lose more than the risk level you set in a particular trade.
Account opening and other charges – There are no account opening or annual charges which you have to pay to use this app.
Fees on profitable trades only – With most other brokers, you have to pay a brokerage charge every time you do a trade irrespective of the end result – you make a loss or a profit. FnO only charges you a fee when you make a profit from the trade.
Real-Time Withdrawal Tracking – FnO gives you better transparency with real-time tracking of withdrawals. You can monitor your funds in real-time from the point you place an order until it reaches your bank account.
Only app – You can download the FnO Play app from the Google Play and monitor the markets on the go to make quick trading decisions.
You can register on the FnO app by providing your mobile number. Once you log in, the app walks you through the features of the app and also gives you 3 practice trades. The first is on INR/USD, the second on BANK NIFTY, and the third on the stock of your choice. Once you are done with three practice trades, you can open your account.
To open your account, you have to verify your account and then set your account PIN. You then need to provide your DOB, name and Email address, PAN card, and bank account.
Trading on FnO is very simple, the first thing you have to decide is whether you want to trade on currency, indices, or stocks. Once you pick the instrument you want to trade on, you have to decide whether the price of it will go up or down. You also have to set a time frame for which you want to keep your trade active. It can be as less as 5 min or can go up to a month. You will also see different charges that will be charged once you pick up an instrument and decide the amount you want to trade with. The different charges are SEBI Fees, Stamp Charge, and Exchange Fees. Then there is the auto-stop level. The auto stop level is stocks and index dependant.
The trade will auto close if there is a profit of 90% or there is a loss of 50% or at the time of market close. Just before you confirm the trade you will see a summary of your trade. Now let us say, you start a trade on ICICI bank and placed the trade with UP option. If ICICI stock goes UP you will have profit, if it goes down you will lose money. You can either stop the trade when you feel like or it will auto-complete if one of the above 3 criteria are met.
If you place any bet you will see within seconds you get a 5% loss or 5% profit or very high percentage change. You only have invested 5000, so how can you lose 5% in a second, the stock does not move so rapidly? If you are a beginner you must be wondering how it happens?
FnO Play app works on leverage. So even though, you have placed a trade of Rs 5000, the app gives you are auto leverage of X times. So let us say you took ASIAN PAINTS and placed a trade of Rs 1000 and leverage was 100 times on this stock. This means you have bought the shares worth Rs 1,00,000 (1000*100). If the stock goes 0.25% down as soon as you place the trade, meaning your 1 lac is now less by Rs 250. Since your actual investment was Rs 5000, your loss will show as 5%. The same applies when you make a profit.
If you talk about user interface and ease of using the app, it is a very neatly designed app. All the features are available on a single screen. There is a real-time chat option, which you can use if you face any difficulties or if you have any questions related to trading on the app. Adding money in your trading account is very simple, you can use GPay, UPI, or any other banking method to load money in your account. Withdrawing money is also real-time, if you place the request in the morning for withdrawal, the amount will reflect in your bank account by end of the day. There are no fees for either adding or withdrawing funds.
If you are beginners and use this platform, you have to be extra cautious. Since every trade comes with leverage, you can lose half of your capital in no time. Instead of auto stop-loss, the feature of putting manual stop loss would have been a lot better. Secondly, every time you try to close your trade, it asks for re-confirmation which takes an additional second or two and it may significantly change your overall profit or loss. Even the leverage is pre-defined and cannot be altered, so every trade is a high-risk trade.
TRADX – It is an upcoming feature for experienced traders custom-built with professional tools to take advantage of mid to longer terms market opportunities.
INTRA – This is a tool for intraday traders crafted for them to trade more efficiently and focus on what they want to: charts and numbers.
Foreigners cannot do day to day trades in India but yes SEBI has permitted Qualified Foreign Investors to invest in India. This allows them to invest in secondary market shares, FPOs, IPO, and also in mutual funds. There is a cap or limit which is laid down by RBI and SEBI which changes from time to time and different instruments have different caps.
Copy trading is completely legal in India and a lot of brokers and platforms are providing this service to users. Copy Trading is a great way to learn to trade for beginners, where risk is less and rewards are good.
However, F&O has its own share of myths and follies. Most rookie traders look at F&O as a cheaper form of trading equities. On the other hand, legendary investors like Warren Buffett have called derivatives as weapons of mass destruction. The truth obviously lies somewhere in between. It is possible to be profitable in online trading for F&O if you get your basics right.
1. Use F&O more as hedge than as a trade
This is the basic philosophy of how to trade in futures and options. One of the reasons retail investors get enthused about F&O is that it is a margin business. For example, you can buy Nifty worth Rs.10 lakhs by paying a margin of just Rs.3 lakhs. That allows you to leverage your capital by 3 times. But that is a slightly dangerous strategy to follow because just as profits can multiply, losses can also multiply in futures. Also, you need to have enough cash to pay mark to market (MTM) margins if the price movement goes against you.
The answer is to look at futures and options more to hedge. Let us understand this better. If you are holding Reliance bought at Rs.1100 and the CMP is Rs.1300, then you can sell the futures at Rs.1305 (futures normally quote at a premium to spot) and lock in profits of Rs.205. Now, whichever way the price goes, you profit of Rs.205 is locked in. Similarly, if you are holding SBI at Rs.350 and you are worried about a downside risk, then you can protect by buying an Rs.340 put option at Rs.2. Now you are protected below Rs.338. If the price of SBI falls to Rs.320, you book profits on the put option and thus reduce the cost of holding the stock. That is how you can make F&O work effectively by getting the philosophy right!
2. Get the trade structure right; strike, premium, expiry, risk
Another reason why traders get their F&O trades wrong is due to bad structuring of the trade. What do we understand by structuring of an F&O trade?
3. Focus on trade management; stop loss, profit targets
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