What are futures and options?
Options and futures are similar trading products that provide investors with the chance to make money and hedge current investments.
An option gives the buyer the right, but not the obligation, to buy (or sell) an asset at a specific price at any time during the life of the contract.
A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date unless the holder's position is closed prior to expiration.
What is the risk involved in futures and options?
Futures & Options (F&O) is a leveraged product inherently, what this means is that to buy Rs 2lk exposure to stocks/index, you will need only a small portion in your trading account - say for example 10% which is Rs 20000. The issue with trading with leverage is that, you can make and lose money quite fast.
Leverage also effects psycologically, because a person is buying for Rs 2lks with only Rs 20,000, he is scared, and typical reaction would be to book profit very fast and if there is a loss panic and do nothing causing a big dent to the trading account.
That said, F&O has a lot of +'s, ability to make money when markets are going down, abillity to take arbitrage strategies, and so on. If you are starting trading F&O, most important thing is to start trading with only the money you can afford to lose .
Having the right mindset.
Overall investor sentiment frequently drives market performance in directions that are at odds with the fundamentals.
The successful investor controls fear and greed, the two human emotions that drive that sentiment.
Understanding this can give you the discipline and objectivity needed to take advantage of others' emotions.