Money Management in Futures & Options Trading - RISK MANAGEMENT

Money Management in Futures & Options Trading -Risk Management

Many of my new clients, ask us about this. To be frank, this aspect or Risk Management System is the first thing to know for any new entrant in markets.

Because, FUTURES & OPTIONS are unavoidable products to Hedge or Trade.  Infact, the majority of trading is done in F&O. Cash or Delivery Trade share is very low in regular basis.

In Currency Futures, take USDINR (Lot $1000, LTP is Rs.54.50) Contract Value is Rs.1000*54.50 = Rs.54,500/- only.  Margin required is say 5% i.e., Rs.2725 only.  If there is a fall of 1% in USDINR then Market Price is Rs 54.50-0.55 paisa = Rs.53.95

In commodity Futures, which are high risk, especially because you pay only 5% of the contract value approximately, and you are taking a risk of 100%. Means you have Rs.100000/- in your account, and the margin on crude is Rs.5000/- you can buy or sell 20 lots with Rs.1,00,000/-

Then find the chance of capital erosion if there is a fall in the underlying (crude in this case)

Percent loss in underlying	Contract value for Example	MTM Loss	Capital Loss
1%	5000*100(Tick Value)=500000/- (Base Price Rs.5000 for ex.,)	1% on LTP 5000 is 50. Then loss is  -50*100 = -5000	Loss 5000*20 Lots = Loss of Entire Capital.