F&O is a popular investment avenue for investors that favor advanced investment options over traditional ones. These financial instruments cater to investors seeking more intricate strategies, higher leverage, and a dynamic approach to managing their portfolios.
To ease up the task of devising investment strategies for investors interested in futures and options trading, there are two major tools that investors can rely on, namely option calculator and margin calculator. These tools allow investors to make data-driven investment decisions, simultaneously eliminating emotional influences.
1. Option calculator:
An option calculator is an algorithmic tool designed for predicting and analyzing options using the Black-Scholes Model as its foundation. It serves as an arithmetic calculating algorithm that aids in determining the theoretical value of an option’s premium or implied volatility.
The Black-Scholes Model is a differential equation that is widely used to set up prices for option contracts. The Black-Scholes equation relies on five key variables:
- Volatility
- The underlying asset’s price
- The option’s strike price
- Time to option expiration
- The interest rate
These variables enable options sellers to establish rational prices for the options they offer.
Option calculators can be found on many stock trading platforms that support future trading and options trading. Typically, an investor would be required to input some details, which include spot price, interest rate, dividend, and implied volatility.
2. Margin calculator:
In F&O trading, investors are required to deposit a certain amount of money, called a margin, to open and maintain a position. The margin helps the trader recover from potential losses to avoid position closures.
There are different types of margins that a margin calculator can calculate. The common type of margin is the SPAN margin, which calculates the maximum loss that the investor’s portfolio can sustain for different outcomes. Other types of margins include:
- Exposure Margin: It is an additional margin collected to safeguard a broker’s liability during market downturns.
- Value Risk Margin: A VaR margin is the probability of an asset’s value degradation based on a statistical analysis of its previous price movement and volatility.
- Extreme Loss Margin: This margin is used to understand the losses that may occur outside the factors considered in VaR margins.
Margin calculators take various factors into account while calculating the margin requirements for different trades. These factors typically include the contract’s value, volatility, and a few other parameters. To use a margin calculator, a trader would be required to input some details such as:
- the stock exchange where the trade will be made
- the product type – futures or options
- net quantity for the trade
- the type of trade – whether it’s being bought or sold.
To conclude, F&O are popular derivatives that have caught the attention of thousands of investors across the globe. While derivatives are closely related to stock trading, the strategies to be followed to become a successful options trader may differ from the strategies used in regular stock trading. Thus, investors should try out tools like options calculators and margin calculators to step into the waters with caution. These two types of calculators fundamentally help investors make data-driven decisions.