How to Trade in Futures and Options with Small Capital?
Apart from intraday trading or short-term trading, Futures and Options (F&O) is another popular segment you can trade in various underlying securities. In day trading, you can trade in multiple times the funds you have available as the margins are allowed by the brokers. However, intraday trading could be risky as you have to close your trade position on the same day.
On the other hand, short-term trading strategies like swing trading need a high amount of capital to fund your trade positions. In swing trading, you can have too many benefits of margins, and you have to pay the full value of money within the delivery of shares into your demat account. But in the F&O segment, you can trade with a small amount of money.
Topics Covered :
- What is Future and Options Trading?
- What is Option Trading and How it Works?
- How to Trade Options with Low Capital?
- Understanding the Market
- Start with Paper Trading
- Learn about the Position Sizing
- Pick the Right Strike Price
- Hold Your Trade for the Right Period
- Trade with Stop Loss and Targets
- Start with Small Investments
- Know Your Risk Tolerance
- Trade with Conservative Strategies
- Conclusion
What is Future and Options Trading?
Before you get to know how to trade in future and options, let us discuss what it is and how it works to make you understand better and start trading even if you don’t have enough money. Future trading is the activity of buying and selling future contracts of the underlying securities at a predefined price irrespective of the market price.
To trade in future contracts lot size is defined for every underlying security, your trade value will be as per the lot size and current future price of the contract. However, you don’t need to pay the full amount but need to deposit the margin money and the final settlement will be done on the day of contract expiry. Meanwhile, on a daily basis, as per the future price movement, you have to maintain the daily margins with your broker to continue your trade.
What is Option Trading and How it Works?
Options trading is different from future trading, in which option buyers are involved in buying and selling option contracts at a predefined price within a specific time frame. The options can be a Call option or a Put option, in a call option, the buyer enters into the contract with the right to buy the underlying security at a predefined strike price on or before the date of expiry.
In put options, the option buyer enters into the contract with the right to sell the underlying security at an agreed strike price before the day of contract expiration. In both call and put types of options, the seller enters into a contract with obligations but not the right to sell the option contract at the agreed strike price before the expiration date of the contract.
Recommended Read: Profit and Loss in Futures and Options Trading
How to Trade Options with Low Capital?
If you don’t have enough money to trade in the option market or don’t want to put a high amount of capital initially in the option market due to high volatility and risk, then you can start with little money. There are some rules you should follow if you want to trade with low capital. Let’s find out how you can trade in future and options with little money.
Understanding the Market
Future trading is easier compared to options, but options trading is a much more complex segment, so you should have complete knowledge to start trading. Clear the entire basic concepts of trading in options markets, types of options, how it works, strike price, premium, volatility, expiration, and other mechanisms that drive the option market. Also, try to understand the types of options strategies for different types of market conditions.
Start with Paper Trading
If you don’t have too much money then don’t invest or trade directly into the F&O market, as you can lose money. First of all, do some practice with paper trading that will help you understand the market movement and also understand how the options market works.
You can pick the option contracts to buy or sell as per your predictions and wait for the results. It will also help you understand how accurate your predictions are and based on that you can change or modify your trading strategies.
Learn about the Position Sizing
In trading, position sizing is the concept of allocating your funds into different trades and also adjusting the trade positions as per the changing market conditions. Option contracts have a limited time period, hence putting all your money could be exhausted as soon as the date of expiration is approaching and there is no movement in the market.
Pick the Right Strike Price
In option trading choosing the deep-in-the-money will cost you very high in terms of the premium you have to pay while buying the option contracts. Hence, choose the right strike price as per your budget or funds available to trade in the option market. You can pick the out-of-the-money strike prices having low premiums that you can buy at low capital. But keep in mind that too far away out-of-the-money strike price option contracts have less price movement.
Hold Your Trade for the Right Period
In future and options, apart from three-month contracts, weekly contracts are also traded giving wide options to trade in this segment. In F&O the price is highly volatile, hence holding your trade position unnecessarily for a longer period can cost you more if the option price not moved and the expiry date arrived, as the option premium becomes worthless.
In future trading, you can carry your trade position till the expiry, but in options, exit timely and always choose the right contract neither too close nor too far away from the expiry date. Carrying the trade positions in options could be risky for option buyers.
Trade with Stop Loss and Targets
If you have limited funds to trade in future and options, losing your money even a little amount could cost you more in terms of reducing your fund of capital. The underlying securities traded in future and options segment don’t have the circuit breaker, which means they can fall or rise with the expected price change, making it risky for the traders to incur huge losses.
Hence, in future options, you should strictly trade with stop loss to avoid major losses. You can calculate the stop loss points and also set the target points to book the profits timely or exit from your trade positions when your targets are achieved.
Start with Small Investments
Future and options are risky, putting all your funds into such trades at the start is not a wise decision. You could lose your major portion of money if you do not trade with the right strategy or if the market does not move as per your expectations. You can start investing with a smaller portion of your corpus and then gradually start increasing the trading amount. F&O options are wasting assets while investing in such, you should keep your exposure limited.
Know Your Risk Tolerance
Risk management in option trading is very important to minimize your losses and maximize your returns. Before trading in such assets, identify your risk tolerance and based on that choose the right underlying assets in F&O and trade with the right strategy to minimize the impact of the risks. Just like low-risk-taking traders, you can trade with the 1% rule, which means limiting your exposure to 1% of your capital funds to limit the exposure of risks in such assets.
Trade with Conservative Strategies
Trading in options is not only risky but it can also give you promising results if the trading strategy works well and the market or underlying security moves as per your expectations, you can get unexpected returns. But it is possible only when you are sure of the upcoming trend of the market and trade with aggressive option trading strategies.
Here if you have limited funds to trade in the options, you should avoid trading in such aggressive or highly risky trading strategies. Choose conservative trading strategies, which can give returns even in highly volatile market conditions. You can choose covered calls or secured puts that require small capital with limited potential for losses and can generate income.
Conclusion
Trading with limited funds is already a challenge in the future and option market. And if you have a shortage of money to trade into such highly volatile and risky markets, then you have to strictly follow the trading rules and trade with the right discipline to avoid major losses. And to avoid such risks, first, you should understand the future and option markets.
Further, start with paper trading to learn various things from this market and calculate your profits and losses on the paper. You should know your risk tolerance and always define the right time period and trade with stop loss and targets to minimize the impact of such risks. The best way is to get help from experts and trade with the right online trading platforms to get the best results.
Recommended Read: Difference between Futures and Options
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