The price of the underlying security is the lifeblood of traders. Whatever type of trader you are, whether short-term or long-term, having a strategy to forecast the direction of prices makes trading much more accessible.
Index futures and Options
While there are many different types of securities out there, equity Index futures and options trading provide the simplest way to speculate on price moves. However, investors need to understand that call options allow them to participate in Bullish price movements while options offer protection in Bearish scenarios.
Here’s a rundown of what call options and put options are, how they work and which ones might be right for your investment portfolio:
As mentioned above, Put options give their holders the right to sell at the strike price. Put options are an effective way to ensure investments against downturns while also providing leverage. On the other hand, Call options give their holders the right but not obligation to buy at a specific price by a particular time for a pre-agreed upon price. These options are ideal for speculating on future prices in Bullish scenarios where their value appreciates over time.
However, it is essential to note that there are differences between trading Index futures and Options versus trading traditional stocks with regards to these two types of securities:
It can only be purchased through a broker.
For one thing, you can only purchase equity Index futures or call Index option contracts through your broker if you meet the minimum financial requirements imposed by local exchanges. And because many countries do not allow citizens to purchase and sell equity Index futures freely, you will first need to find a broker willing to facilitate.
Furthermore, unlike equity options which trade during specific hours on an end-of-day basis, Index futures cannot be traded from the same timeframe because the underlying financial instrument is still open for trading until expiry. Even before contracts expire, it may be difficult to short positions due to increased demand from investors.
No standardized call or put options
In addition, there are no standardized call or put option contracts where each contract has a maximum order quantity, maximum price limit and minimum price increment. Therefore both experienced and novice traders must understand these factors before even considering entering a position. That being said, with careful planning and risk management, any individual has the potential to profit from these contracts if they are correctly executed.
As you can see, call or put options are handy tools for investors looking to speculate on an index’s price in the future. However, before traders even consider entering a position, they must understand all the risks associated with their investments, including how much they will cost them.
There are many more ways to play the stock market than call and put options alone. Let’s list them by their type:
In day trading you buy and sell the same stock in one day, making a quick profit from small price fluctuations.
Long Term Investment
You buy stocks that you intend to hold for months or years; Apple Inc. would be an example of this! It’s preferable if you’re confident that the company has good prospects for growth, but it also means more risk on your end.
These include “covered calls” (selling call options against underlying shares you already own), “bull spreads” (buying call/put options with higher strike price than lower ones, so any movement upwards will make you gain more money) and many others depending on your investment and market views.
The most advanced way to play the market is through limit orders: these let you specify how many shares and at what price point you want to buy/sell. It makes it easy to quickly buy or sell stocks without worrying whether anyone will accept your offer.
Having a solid understanding of Equity Index futures and Options allows traders to hedge their portfolios against downturns while also profiting from Bullish scenarios at the same time. While this may sound simple enough for experienced traders, forecasting these movements are not easy for novice investors without proper training.