Derivatives are financial instruments that do not have any price value. Derivatives are different from other securities because they have an expiry date after the contract expires. In India, the derivative category contains Futures and Options (F&O) of equities, which helps you buy or sell the underlying asset at an already determined price.
Under a Futures contract, you have an obligation to buy/sell the underlying assets at the strike price by the expiry date. However, in the case of Options, you have a choice and an obligation to buy/sell the asset at the pre-determined price by the specified date.
Key F&O Strategies to Use on Expiry Day
Below, we have mentioned the three most important strategies that you can make use of on the day of expiry of the contract on an F&O trading app –
- Bull Call Spread
Traders can initiate a moderate strategy with the reduced premium outflow and a lower break-even point known as the Bull Call Spread. This trading strategy aims to provide you with gains from the index’s or stock’s limited rise in price. The strategy follows two options to create a range, an upper strike and a lower strike.
- Long Gut Spread
Suppose you expect the price of a particular security to move significantly on the day of expiry, but can’t figure out the price direction. In that case, you can adopt the strategy of Long Gut Spread. Under this options’ strategy, you need to buy both an In The Money (ITM) put option and an In The Money (ITM) call option. It helps you leverage the gap between the two options irrespective of the market condition.
- Bear Put Strategy
A bear put strategy comprises selling one put at a higher strike and buying another put at a lower strike price. It does not matter which side the market moves; you can use the other as a hedge to realise one of these puts.
- Long Strangle
If you are unsure about the direction of the markets, you can adopt the long strangle strategy. Under this, you need to buy an out-of-the-money put and an out-of-the-money call option expiring on the same date. The call option’s strike price should be higher than the underlying asset’s current price, and the put option’s strike price should be lower than its counterpart. The expected profit from this strategy is unlimited, as the underlying asset price can rise or fall to any limit. However, the risk is limited to the net premium paid for the two options.
Conclusion
There is no doubt that the F&O is a little more complex than equities and other securities. However, nothing is tough with the right strategies, research, and mindset! Always make your online trading decisions on an F&O Trading App after detailed calculations and execute them with peace of mind to make sound calls.