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Futures And Options-how Do They Work?

By Expert Author: abhijit

Risk measurement is extremely important when one is trading in futures and options. Profit is no bar for the deserving individual, but it is hard work on all counts. These two signify derivative forms or investment vehicles having an underlying investment source. This may be any one among commodities, stocks, or bonds. Traders dealing with this kind of trading can be either speculators or hedgers.
Here is how you can this kind of trading platform works.
• It is important to remember that both of these signify underlying indexes, stocks, or commodities. These come with specific expiration dates where trading is at a premium to overall underlying asset value. Here, instead of cash payments for specific underlying assets, good faith acts as the depositor in behalf of the investor, making this arrangement liable for the balance. There is devaluation in the premium value, after some time in this kind of arrangement. Resultantly, during an expiry time security will trade near underlying value of security.
• It is important to remember that both future and options signify leveraged investments. This means that, here the risk element remains separate from underlying assets. This kind of arrangement is known as volatility. In other words, volatility is the daily differences related to the highest and the lowest stock prices. It will take the focus away from the underlying stock direction or disguise it completely. This will also raise the level of premium necessary for realisation of increased risks related to future or option.
• Trading strategies relate to future/options involve 3 themes in general. This includes trend following, the intermediate strategy related to general trend following in both down and up direction. Hedged trading signifies security purchase along with option or call sales for successful collection of premium time value. An important requirement of pattern recognition is technical analysis familiarity, along with statistical probability that says certain patterns of chart signify bear or bull moves. This in turn helps with an accurate prediction of results.
• Those who want to minimise the risks involved related to futures and options can trade successfully through proper training and money management strategy. The mantra of proper money management is that a trader should take systematic and calculated risks keeping amounts of loss per trade as low as possible. Many times, it is even lower than 2% compared to the overall size of the investment portfolio. Professional traders are able to achieve proper risk management by trading in commodities and stocks together, which in turn leads to diversification of portfolio. In order to survive in this field a trader must have proper money management skills, which is extremely crucial. This helps them to aptly control the diversification processes, along with volatility, helping to build confidence as time goes by.
It is important to remember that futures and options are difficult trading vehicles compared to other available options. Here are the trading occurs in accordance to premiums as well as the underlying security prices. So take your time to learn the ropes of the trade and then give it a go with confidence, making expected profits in the process.

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