Investing in the high-risk world of futures and options can significantly boost returns when done correctly. However, the dangerous nature of these investments scares away many. Are there approaches using futures and options that virtually eliminate risk? While entirely removing risk is impossible, some tactics can hugely decrease exposure. Let’s learn about them in detail.
-
Hedging with Calls
Holding an asset while selling a call option makes a “covered call” strategy. The call’s premium, received upon sale, is a buffer against minor price drops in the underlying holding.
For example, possessing 100 shares of XYZ at ₹500 apiece allows selling a ₹550 call. If XYZ remains under ₹550, the premium is kept. If it surpasses ₹55, the shares are sold there, benefitting from appreciation and premium.
-
Insuring with Puts
A “protective put” involves having a long position in an asset and buying a put option. This function acts as protection, restricting potential losses if the asset’s price falls.
For example, you own 100 shares of one organization trading at ₹100 apiece. A put option with a strike of ₹95 protects against losses if the stock plummets below that price. This protection allows you to sell the shares for ₹95 even if their market value declines.
-
Bull Call Spreads
While bull call spreads can constrain profits when stock prices ascend, risks remain restrained, too. Consider a tech firm DEF trading at ₹500. One may buy a ₹500 call and sell a ₹600 call, using the premium from the latter to partially offset the cost of establishing the position. So, the payment obtained from selling the latter contract curtails the expense of initiating these trades.
-
Iron Condor Strategy
With an iron condor strategy, puts and calls are simultaneously sold around a target price and offset with further out-of-the-money options purchased for protection. On stock trading between ₹450-550, one may sell a ₹450 put and ₹550 call while buying a $400 put and $600 call, keeping the net credit as maximum profit if the share price remains inside this range.
Saving on Brokerage Fees
Brokers now offer a zero brokerage account that eliminates per-trade fees. It helps preserve trading profits that may otherwise be eaten away, especially for frequent futures and options traders who modify positions. Leveraging such accounts allows strategies like these to be implemented more cost-effectively.
Moreover, a brokerage calculator can be an invaluable tool. It helps investors estimate the total cost of their trades, including hidden fees and taxes, thereby providing a clear picture of potential returns. Using a brokerage calculator allows for more informed decision-making and precise execution of strategies.thereby providing a clear picture of potential returns. Using a brokerage calculator allows for more informed decision-making and precise execution of strategies informed decision-making and precise execution of of strategies.
Parting Words
While no investment strategy can eliminate risk, certain F&O strategies can significantly reduce it skillfully. By carefully leveraging these tactics, investors can better manage their exposure to market volatility in the futures and options segment. As always, extensive research and careful planning are paramount to successfully navigating the complex nuances of F&O trading with steadiness.
