Futures and Options is a derivative product of the stock market. This constitutes an appreciable section of both Indian and global markets. As the reports validate, the derivative market constitutes a staggering $1 quadrillion of the overall market.
The Indian market does not lag in the future and options trading either. A recent survey by SEBI reported that the derivative market valuation has shot to INR 500 lakh crore in FY24. In fact, the number of unique traders participating in this sector has hiked to 45.2 lakh for FY2021-22 from 7.1 lakh in FY2019-20. Additionally, the sharp rise is ongoing.
However, there are certain risks associated with trading in this sector. Hence, an exhaustive fundamental analysis is essential to mitigate risk as far as possible. Keen to invest in future options?
Let us guide you through the path in this article. Here, we have discussed the five market drivers of fundamental analysis for future option trading. Read along to know more.
Table of Contents
Market Drivers in Fundamental Analysis For F&O
In order to soar higher in the stock market competition, investors are required to conduct multiple analyses before investing. Among those, fundamental analysis is one of the major ones. There are two types of fundamental analysis – qualitative and quantitative.
The former deals with factors such as business models, industry trends, etc. On the other hand, the latter handles the company’s financial details. Here, we will look at the five most significant factors comprising both the types of fundamental analysis.
- Earning per share
This is usually referred to as a company’s EPS. One of the fundamental market drivers for future option trading is the profit received by investors. An increase or decrease in this figure will reflect the percentage of profitability and loss of the company.
EPS is calculated by dividing the net income by the available shares. This is a highly important KPI of fundamental analysis. It help investors decide the growth potential of a company. This insight will help in risk mitigation especially in the F&O sector.
- Profit Margin
The profit gained by companies at the end of each fiscal year after their yearly activities is termed as profit margin. This metric showcases the financial health of the company. Additionally, it also aids in comprehending the market position of the enterprise.
The equation is simple. A better profit percentage proves the business’s satisfactory financial strength and vice versa. It is calculated by dividing the company’s income by the revenue. You must always calculate the profit margin before investing in F&O to avoid incurring losses within the given period.
- P/E Ratio
The third fundamental market driver is the price-to-earnings ratio, which helps in evaluating the share prices. Investors searching for undervalued stocks with growth potential to invest in future options can calculate this ratio.
A higher P/E ratio indicates the share is overvalued, and a lesser value means it is undervalued. As an investor, compare the ratio with the company’s past performance to gauge its growth potential.
- Year-on-Year Growth
The annual reports procured by companies at the end of each fiscal year are compared to comprehend whether the enterprises’ performance improved or deteriorated. However, you must also consider the reasons behind the performance fluctuation.
If the earnings and revenue of the company are gradually improving, then it will be a safe and stable share. However, if the past few Y-o-Y figures display a sharp rise and sudden drop, reconsider it for trading in this sector.
- Profit after Tax
After a company gains its profit, it pays a certain amount of tax. The remainder sum is referred to as PAT. However, along with tax companies, they need to pay dividends and other liabilities from that profit.
Hence, even if you compare the profit margin, you must also consider comparing the PAT amounts of companies. This will help you to plan your strategies more accurately and maximise your profit.
Final Thoughts
Experts profess that investing in derivatives is riskier than cash market investments due to the obligation and expiration. Hence, investors must conduct a thorough fundamental analysis along with a technical analysis for descriptive company details. For an enriching experience, you can use Motilal Oswal’s Research 360.
