Futures & Options (F&O) Trading

1. What Are Derivatives?

A derivative is a contract whose value “derives” from an underlying asset such as:

Stocks

Indices (Nifty, Bank Nifty)

Commodities (Gold, Crude Oil)

Currencies (USD/INR)

Derivatives allow traders to take positions on the future price of an asset without owning it. The main types of derivatives are Futures and Options.

2. Futures Trading
2.1 What Is a Futures Contract?

A Future is a legally binding agreement to buy or sell an asset at a predetermined price on a future date.

Example:
A Nifty Futures contract expiring in January obligates you to buy or sell Nifty at an agreed price on the expiry date.

2.2 Key Features of Futures

Obligation
Both parties must fulfill the contract on expiry (unless squared off).

Standardized Contracts
Exchanges predetermine lot sizes, expiry dates, and contract specifications.

Mark-to-Market (MTM)
Daily profits and losses are settled automatically based on price movement.

Margin-Based Trading
You don’t pay full contract value — only ~10–15% margin is required.

High Leverage
Because of margin, returns (and losses) can be amplified.

2.3 How Futures Trading Works

Suppose Bank Nifty is at 49,000.
You buy a Bank Nifty Future at 49,100.

If Bank Nifty rises to 49,500, your profit is:

Lot size × 400 points
(Example: If lot size = 15 → profit = 400 × 15 = ₹6,000)

If Bank Nifty falls to 48,700, you incur a loss.

Thus, futures trading is a pure directional bet.

2.4 Why Traders Use Futures

Speculation on price movement

Hedging existing stock positions

Arbitrage opportunities

High liquidity, especially in index futures

3. Options Trading

Options are more flexible than futures. They provide rights, not obligations.

3.1 What Is an Option?

An Option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a preset price (strike price) before expiry.

There are two types:

Call Option (CE) → Right to buy

Put Option (PE) → Right to sell

Options come in two roles:

Option Buyer (pays premium, limited risk)

Option Seller / Writer (receives premium, unlimited risk)

3.2 Call Options (CE)

A Call Option buyer expects the price to rise.

Example:
You buy Nifty 22000 CE for ₹100 premium.

If Nifty moves above 22000 + 100 = 22100, you start profiting.

If Nifty stays below 22000, your maximum loss = premium paid (₹100 × lot size).

3.3 Put Options (PE)

A Put Option buyer expects the price to fall.

Example:
You buy Bank Nifty 49000 PE for ₹150 premium.

If Bank Nifty drops below 49000 – 150 = 48850, you profit.

Loss is limited to premium paid if the market moves up.

4. Option Greeks (Quick Understanding)

Options pricing is influenced by:

Delta – direction sensitivity

Theta – time decay

Vega – volatility sensitivity

Gamma – acceleration of delta

Rho – interest rate impact (low impact in India)

For beginners:

Buyers lose money due to Theta (time decay).

Sellers earn money from Theta, but face unlimited risk.

5. Expiry, Lot Size, and Margin
Expiry

F&O contracts come with fixed expiry dates:

Weekly expiry – Index options (Nifty, BankNifty, etc.)

Monthly expiry – Stock options & futures

Lot Size

Each contract has a fixed lot size. Example:

Nifty lot = 25

Bank Nifty lot = 15

Reliance lot = 250

Margin

Futures require margin (~10–20% of contract value).

Option buyers pay premium only.

Option sellers need large margin because risk is unlimited.

6. F&O Strategies
6.1 Futures Strategies

Long Future (bullish)

Short Future (bearish)

Hedging (using futures to protect holdings)

6.2 Options Strategies (Beginner to Advanced)
Beginners

Long Call

Long Put

Protective Put (hedging)

Covered Call (safe premium strategy)

Intermediates

Bull Call Spread

Bear Put Spread

Iron Butterfly

Straddle

Strangle

Advanced

Iron Condor

Calendar Spread

Ratio Spreads

Delta-neutral strategies (used by professional traders)

7. Why F&O Trading Is Popular in India

High Leverage → Higher Profit Potential

Low Capital Requirement

Weekly Profits from Index Options

Huge Liquidity in Nifty & Bank Nifty

Perfect Tool for Hedging Stock Portfolio

8. Risks in F&O Trading

F&O provides opportunities, but it also carries high risk, especially for beginners.

8.1 Leverage Risk

Small price movements can cause big losses.

8.2 Time Decay in Options

Option buyers lose money if price doesn’t move quickly.

8.3 Volatility Crush

Premium collapses after major events (election, budget).

8.4 Unlimited Losses for Sellers

Option writers face unlimited losses if market moves sharply.

8.5 Liquidity Risk

Stock options may have low liquidity → high slippage.

8.6 Psychological Pressure

Fast price movements create stress, leading to impulsive decisions.

9. Best Practices for Successful F&O Trading
1. Never Trade Without a Stop-Loss

Controls losses and preserves capital.

2. Position Sizing Is Key

Avoid putting entire capital in one trade.

3. Understand Greeks Before Doing Complex Option Strategies
4. Avoid Over-Leveraging
5. Backtest & Practice on Paper Trades
6. Trade Only Liquid Contracts

Index options are safer than illiquid stock options.

7. Hedge Your Positions

Professional traders always hedge.

8. Keep Emotions in Check

Discipline matters more than strategy.

10. F&O Example for Better Understanding

Let’s say Nifty is at 22,000.

Scenario 1: Long Future

Buy Nifty Future at 22,050

Lot size 25

Market moves to 22,250

Profit = 200 × 25 = ₹5,000

But if market falls to 21,900:

Loss = 150 × 25 = ₹3,750

No limit unless stop-loss applied

Scenario 2: Buy a Call Option (22,100 CE @ ₹80)

Total cost = 80 × 25 = ₹2,000

If Nifty moves to 22,300:

Intrinsic value = 200
Profit = (200 – 80) × 25 = ₹3,000

If Nifty stays below 22,100:
Loss = ₹2,000 (limited)

Scenario 3: Sell a Call Option (22,300 CE @ ₹60)

If Nifty stays below 22,300:

Profit = premium earned = ₹1,500

If Nifty shoots up to 22,800:

Loss = (500 – 60) × 25 = ₹11,000
Loss is unlimited. Hence selling options requires skill & hedging.

11. Who Should Trade F&O?
Suitable for:

Experienced traders

People who understand price action & volatility

Hedgers

Option sellers with adequate capital

Not suitable for:

Beginners with no risk management

People trading emotionally

Traders who cannot monitor markets

12. Conclusion

Futures & Options (F&O) trading is a powerful segment of the market that offers leverage, flexibility, and opportunities for hedging and speculation. Futures provide high leverage and mandatory execution, while options offer rights with limited risk for buyers and premium income for sellers. Successful F&O trading requires understanding of contract specifications, market psychology, volatility, Greeks, and strict risk management.

If traded responsibly, F&O can enhance returns and provide sophisticated strategies. If traded without knowledge or discipline, it can lead to large losses. The key is education, practice, and risk control.