Derivatives market is very popular worldwide as it provides the benefit of LEVERAGE. You pay Rs.20 and get the exposure of Rs.100. But this benefit creates huge risk/losses in Market as Investor takes risk of Rs.100 by paying just Rs.20.

There are 5 ways to improve your efficiency in Derivatives trading :

1. Importance of Hedges :

Options can become a very good hedging tools while trading Futures. You can reduce your probability of losses or you can restrict the amount of maximum losses by using Call Options or Put Options at right place.

For example : When you buy Future, you carry unlimited loss risk downside. But if you buy one Put Options with this trade, it provides hedge against downside risk. This is a very basic step of Hedging. Smart Traders can use some Spreads techniques to reduce the risk as well as hedging cost.

2. Buying Options or Selling Options:

Normally, People feel that Buying Options is safe as it is having limited loss profile. We should check the premium outgo before buying Options. Options carry a very limited life so they become zero quickly. Option buying is good for people who want to earn unlimited profit in very short period of time subject to their view goes correct.

I feel that Spreads are safe compare to Plain vanilla Options buying.

3. Fund Management :

This is a very important step for long term viability in Derivatives Trading. People lose huge money when market moves one sided. Derivatives markets checks the power of investors to afford Mark to Market loss. People who have survival planning can earn huge profits. Investors should either have defined maximum risk profile or emergency risk capital for uncertainty.

4. Usage of Collateral Margin :

Investors don’t need to pay full margin in form of Cheques. They can use their FDs, Mutual Funds and Equity Shares as collateral. It creates double utilization of resources. Investors can earn Interest yield on FDs and profits from Derivatives market.

5. Options Greeks and Volatility :

Understanding of Options Greeks and Volatility can help Investors to find out the Opportunity in market. They can easily evaluate risk return profile of Strategies. It is good to see the expiry pay off graph of Derivatives Strategy but it is very important to see the live market payoff graph from first day to expiry day.

This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.