How risky is it to trade in F&O ?

Futures & Options (F&O)  are complex financial instruments with leverage, which can lead to significant loss of capital if traded without proper risk awareness. 

Common risks associated with F&O trading : –

–Due to liquidity and market volatility, F&O orders can be executed partially or at substantially different prices. 

–Due to a significant gap between buying and selling price, orders can be filled at prices distant from the Last Traded Price (LTP), resulting in increasing impact costs.

(Imagine, Shyam is a person , who wants to purchase 100 shares of a particular stock, and the Last Traded price (LTP) is 50 per share. But due to liquidity in the market, there is a difference between buying price and selling price, say 5. When he placed an order to buy, he might get executed at a price of 52 per share instead of LTP of 50. Thus, his order is executed at a 4% higher price than the LTP. Suppose, he bought 100 shares by paying an amount of 52,000 instead of 50,000. Now this extra 2,000 represents the impact cost, which increases the overall cost. )

–Purchasing options can lead to total loss of the entire premium paid, while selling options can result in even greater loss surpassing the initial margin if the price moves in a different way and not in the expected way. Ensure you calculate the payoff to check your position’s maximum potential profit and loss with the help of Kite position analyser. 

–The losses can be much higher and exceed the initial margin, if the price doesn’t move in the expected direction for future positions. 

–Positions can have rising dynamic margin requirements, which can result in margin shortfalls. To avoid our RMS system from squaring off your positions, any shortfall must be deposited into the account. 

–Stock futures and stock option positions which expire in the money (ITM) carry physical settlement risks. These risks involve taking delivery of the underlying shares without having enough funds and potentially short delivery risks. 

–Risks of sharing your login information with scammers who claim to boost your earnings through managing your money or assisting in financial advice. 

–Increased leverage can result in losses higher than the initial margin. For example, A person named Ram invested in stock futures with an initial margin of 10,000 at a leverage ratio of 10 :1. Now, it means that Ram is holding a position of worth 1,00,000 while he only invested an amount of 10,000. Suppose, the market moves away from his expectation and 20% loss has incurred that means he has incurred a loss of 20,000. But he only invested 10,000. Hence, Ram incurred a loss more than his initial margin. 

The above are the reasons explaining why trading in F&O is so risky.  

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