What are the risks of trading Futures and Options (F&O)?

Answer:Trading Futures and Options (F&O) involves intricate financial instruments that may result in a permanent loss of capital if not approached with a good understanding of the associated risks.
Key risks of F&O trading include:

  • Partial Execution and Price Differences: F&O orders may be executed partially or with significant price differences due to liquidity and market volatility. This can lead to orders being executed at prices far from the Last Traded Price (LTP), increasing impact costs.
  • Example: An illiquid contract may execute a market buy order for 100 shares at ₹19.85, resulting in an impact cost of ₹10.8. Iceberg orders can help reduce impact costs.
  • Options Trading: Buying options may result in losing the entire premium paid, while selling options can lead to losses exceeding the initial margin if the price doesn’t move as expected. Always use the Kite position analyzer to calculate the payoff and assess maximum profit and loss for your positions.
  • Market Movement and Future Positions: If the price doesn’t move as expected for future positions, losses could surpass the initial margin. Dynamic margin requirements may increase, causing margin shortfalls that must be covered to prevent our RMS system from squaring off your positions.
  • Physical Settlement Risks: Stock futures and stock option positions expiring In The Money (ITM) pose physical settlement risks, including the potential of taking delivery of underlying shares without sufficient funds and short delivery risks.
  • Security Risks: Be cautious about sharing your login information. Scammers may claim to help you make more money, leading to potential financial risks.
  • Leverage Impact: Higher leverage can result in losses exceeding the initial margin.
  • Risk Disclosure Document (RDD): Upon account opening, a copy of the Risk Disclosure Document (RDD) is sent to the registered email address. The RDD provides crucial information about risks associated with trading or investing in any capital market instrument.
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