Futures & Options Trading Is Not for Beginners (And What to Do Instead)

Future and option buying interests you? For novices, F&O trading can be dangerous. Here's why and what long-term success calls for you to think about.

"The first rule of investing is don’t lose money. The second rule is don’t forget the first rule." – Warren Buffett


Trading futures and options (F&O) appears interesting. Easy money, advantage, and many possibilities! 
Reality is that novices find it difficult.

If you have never traded, entering F&O is like learning to swim in a shark tank. 

Let's dissect why F&O trading is dangerous for novices and discuss other strategies.

What Is Futures & Options Trading? 

Purchasing and selling contracts allowing you to agree on a price for an item at a future date is the essence of futures and option trading. 
  • Future: An agreement to acquire or sell an item at a specified price on a designated date in the future is a futures contract. You have to close the agreement at that moment. 
  • Option: An Derived contracts called futures and options (F&O) let traders gamble on index, commodity, or stock price fluctuations.

Futures are contracts to purchase or sell a good at a fixed price on a designated future date.
Options are agreements allowing you to buy or sell a good at a set price before a designated date. Though you are not obliged to, you have the option to do so.
 
Does that sound like it would generate income? Absolutely. 

Here's why beginners find F&O trading challenging.

Also read: What is MTF

1. You cannot keep it for very long; the Time Bomb Effect

Futures and options contracts expire—usually after a month or even a week—while equities you can keep for a long time. 

Therefore,
  • No wait for a stock to recover is necessary. 
  • Not increasing long-term interest. 
  • Not "buy and hold" strategy.
Time is your greatest friend in trading; in F&O it is your enemy always running against.
"The stock market is designed to flow money from the Active to the Patient." Warren Buffett

2. Use leverage—a two-edged blade cutting deep.

Buying futures and options lets you employ leverage, thereby enabling you to trade with more money than you own. That sounds fantastic! No...No.. Wait...Wait

With leverage,

✔ A 5% loss will cut your money by half. 
✔ Small traders have few chances if they make a mistake.
✔ A margin call could make you leave losing money.

Leverage is a Ferrari without brakes—thrilling yet lethal.

"Please tell me where I might die, so I can avoid that place". -- Charlie Munger

3. Greater volatility indicates more chance of losing money.

Like riding on a roller coaster without a seat belt, F&O markets are somewhat erratic.

  • Usually, stop losses start to be triggered.
  • Because markets fluctuate erratically, indicators and trends are less trustworthy.
  • Good strategies sometimes fail; with futures and options, time could work against you.
F&O investing is not for you if you hate stress and have trouble sleeping.
"The real profit comes from being patient not from buying or selling." Charlie Munger

4. Frequent trading equals low wealth creation plus high costs.

Compounding is the secret to wealth building; F&O trading forces you to:

  • Trade often = Slippage, more trading costs, taxes.
  •  Choose temporary hazards before long-term benefits.
  •  Keep your investment minimal; this will make gradual growth of your money difficult.
"It's about how much you save, not about how much you make". Warren Buffett

5. The Mental Exhaustion Hidden Cost of Trade

Financial and psychological aspects of F&O transactions can be demanding.
  • Spending all day looking at charts.
  • Managing risks and adjusting positions.
  • Constantly fearing margin calls.
It's like playing high stakes poker, when one bad action could wipe off your whole stack.
"Help someone learn more; that is the best thing a person can do." Charles Munger

Would You Want to Avoid F&O Trading Forever?

Not absolutely! If you have knowledge, money to invest, and know how to control risks, futures and option trading can be rather successful. 

Should you be a novice:
  • Start with mutual Funds, ETFs, or equities. 
  • Before beginning trading, learn technical and underlying analysis;
  • Never risk more than 1–2% of your money on any trade.
"The stock market helps shift money from those who wish quick returns to those who are ready to wait." Warren Buffett

Last Words: Engage in a Game You Will Win. 

While trading futures and options can appear appealing, so can gambling. If you wish to create actual riches, give long-term investing top priority. If you choose to trade in F&O, make sure you do it knowing, experienced, and with a strategy to manage risks rather than depending solely on hope.

"Just wishing for things to get better isn't a plan"- Warren Buffet
Are you ready to make a wise investment or would you like to gamble?

That's wrap!! Thank you for reading.

Location: Ahmedabad, Gujarat, India

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