One of the most active trading areas in the world is the Indian derivatives market. The National Stock Exchange (NSE) is always the largest derivatives exchange in the world by volume, and a lot of this growth has come from regular people buying and selling futures and options (F&O). There are many ways to trade derivatives, but two stand out: intraday trading and positional trading. Both styles have their own pros and cons, and the choice between them often depends on the trader's personality, how much money they have, and how much risk they are willing to take.
This article talks about the pros and cons of intraday and positional trading in derivatives, as well as when each type of trading might be more useful.
What you need to know about intraday derivatives trading
Intraday derivatives trading is when you open and close futures or options positions on the same trading day. No trades are carried over to the next day, and the trader's main goal is to take advantage of short-term price changes.
For example, a trader could buy a Nifty futures contract in the morning for 22,000 and sell it in the afternoon for 22,100, keeping the difference. In the same way, an options trader could buy a Bank Nifty call option for 200 and sell it later in the day for 250.
Important Things to Know About Intraday Trading
A short time frame, usually minutes to hours.
It depends a lot on price momentum and volatility.
Needs to keep an eye on charts and indicators all the time.
When compared to overnight positions, margins are lower.
By 3:30 PM, all trades must be finished.
Getting to Know Positional Derivatives Trading
When you do positional trading, you keep futures or options contracts for days, weeks, or even months. Traders in this group pay less attention to short-term price changes and more attention to medium- to long-term market trends.
For instance, a trader might buy Infosys futures ahead of an earnings report and keep them for ten days, hoping for good news. Also, a trader might sell a Nifty 22,500 call option that will expire in two weeks, thinking that the index won't go above that level.
Important Features of Positional Trading
The time frame can be days, weeks, or months.
Needs a higher margin because it involves overnight exposure.
Tries to catch bigger price changes and long-term market trends.
Could include both basic and more complex option strategies.
Exposed to global events that happen overnight and on weekends.
Benefits of trading derivatives during the day
Less money needed
Brokers and exchanges have lower intraday margin requirements, which means that traders can control bigger positions with less money than they could with positional trades.
No Risk at Night
Since trades are closed before the market closes, traders don't have to worry about the risks that come with global news, geopolitical events, or moves in the international market that could cause gaps the next day.
Many chances to make money
Indices like Nifty and Bank Nifty can change a lot during the day, which gives traders many chances to make quick profits in a single session.
Learning Curve That Goes Faster
Intraday traders make a lot of trades in a short amount of time, which helps them quickly learn how to read charts, understand price action, and be more disciplined.
Disadvantages of Trading Derivatives Intraday
A lot of stress and time needed
You need to be able to make quick decisions and stay focused all day when you trade intraday. Even small delays in execution can cost you money.
High Costs of Transactions
Making more than one trade a day can increase your brokerage, taxes, and other costs, which can cut into your profits.
Risk of Over-Leverage
Traders often use a lot of leverage during the day. This can make gains bigger, but it can also cause big losses in a matter of minutes.
Reliance on Volatility
When markets stay in a range, it can be hard to trade during the day, and strategies often don't work.
Benefits of Trading Positional Derivatives
Ability to See Bigger Trends
Traders who use positional strategies look for moves that last for days or weeks. A long-term rise or fall in the market offers much more profit potential than short-term changes.
Less Noise During the Day
Prices in the market can change quickly during the day, but longer-term trends tend to move in more obvious directions. Positional trading helps you avoid false signals during the day.
Strategies that can change
Traders can use advanced option strategies like straddles, strangles, and spreads that take time to work out, which is not possible during the day.
Less time in front of a screen
Traders who trade based on position don't have to keep an eye on the markets all the time. It's usually enough to look at your positions once or twice a day.
Disadvantages of trading positional derivatives
Risk on weekends and at night
Holding positions after the market closes exposes traders to events around the world. A big announcement, a rise in geopolitical tension, or breaking news can cause big gap-ups or gap-downs.
More money needed
Full margin requirements for overnight positions tie up more money than intraday trades do.
Options Time Decay
If the market doesn't move in the right direction quickly, the premium for option buyers goes down over time. This theta decay is something that positional traders need to think about.
You need to be patient and disciplined.
To hold trades in positional trading, you need to be sure of yourself and be patient, which can be hard on your mind when the market is volatile.
Which style is better?
The trader's goals and personality will determine whether they should trade intraday or positionally.
People who like fast-paced environments, can focus fully on the markets, and like to make small profits often are better suited for intraday trading. It works well for traders with less money who can use intraday leverage to their advantage.
Traders with more money, the ability to handle overnight risks, and the patience to ride trends for several days are better off with positional trading. This style works well for people who like structured strategies and are good at looking at both fundamentals and technicals.
Some traders who have been doing this for a while use both. They do intraday trades when the market is very volatile and hold positional trades at the same time to take advantage of bigger market moves.
Nifty Futures: A Case Study
The Nifty could move 400 points in one session on Union Budget Day. During the day, an intraday trader might make a number of smaller trades worth 50 to 100 points each. On the other hand, a positional trader who entered before the Budget and held the trade could make the whole 400-point move in one position. Both methods can make money, but they do so in very different ways and with very different levels of risk.
Advice for traders of intraday derivatives
Stay with liquid instruments like Nifty, Bank Nifty, and stock options that are traded a lot.
To protect your money, always use strict stop-losses.
Don't trade based on your feelings or trade too much in markets with low volatility.
Keep an eye on important economic events and announcements that could affect the markets that day.
Tips for trading positional derivatives
For more accurate results, use both technical and fundamental triggers.
Use option spreads or hedging to deal with risks that come up overnight.
Instead of focusing on one trade, spread your investments across different sectors and instruments.
Stick to strict rules about how to allocate capital and only risk a small amount of it on each trade.
In conclusion
Intraday and positional derivatives trading are both very important to the Indian financial markets. Intraday trading is all about speed, accuracy, and taking advantage of price changes during the day. Positional trading, on the other hand, is all about being patient, following trends, and making bigger moves.
Neither is always better; your trading style should match your personality, risk tolerance, and available capital in order to be successful. Many successful traders end up using a mix of short-term and long-term bets, finding a balance between quick intraday opportunities and longer-term bets.
No matter what method you use, discipline, risk management, and consistency are the most important things that will make you successful in derivatives trading.
