Futures & Options (F&O) Trading

Introduction

Futures and Options (commonly known as F&O) are among the most exciting segments of financial markets. They fall under the category of derivatives trading, meaning their value is derived from an underlying asset such as stocks, commodities, currencies, or indices.

Unlike simple buying and selling of shares, F&O trading allows investors to hedge risks, speculate on price movements, and even leverage small capital into big trades. However, it also carries high risk and requires deep understanding.

This guide will cover:

What F&O trading is

How futures work

How options work

Key terms

Strategies used

Advantages & risks

Practical examples

Psychology of F&O trading

Regulations in India

Final thoughts for beginners

By the end, you’ll have a solid foundation in F&O trading.

Part 1: Understanding Derivatives
What are Derivatives?

A derivative is a financial contract whose value depends on the price of an underlying asset. For example, if you buy a derivative linked to Reliance Industries stock, its value will move as Reliance’s stock price moves.

Derivatives can be of many types:

Futures

Options

Forwards

Swaps

In India, the most popular are Futures and Options (F&O).

Part 2: Futures Trading
What are Futures?

A futures contract is an agreement between two parties to buy or sell an asset at a predetermined price on a future date.

Buyer of futures: Agrees to buy the asset in future.

Seller of futures: Agrees to sell the asset in future.

Both are obligated to honor the contract on expiry.

Key Features of Futures:

Standardized contracts – traded on exchanges (like NSE, BSE).

Leverage – You pay only a margin (a fraction of total value).

Settlement – Can be cash-settled or delivery-based.

Expiry dates – Futures have fixed expiry (weekly, monthly, quarterly).

Example of Futures:

Suppose Reliance stock is trading at ₹2,500.

You buy a Reliance Futures contract (lot size 250 shares).

Contract value = ₹2,500 × 250 = ₹6,25,000.

But you don’t pay full amount, only margin (say 15% = ₹93,750).

If Reliance rises to ₹2,600, your profit = (100 × 250) = ₹25,000.
If Reliance falls to ₹2,400, your loss = ₹25,000.

So, futures magnify both profit and loss.

Part 3: Options Trading
What are Options?

Options are more flexible than futures. An option gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a fixed price on or before expiry.

There are two types of options:

Call Option (CE): Right to buy.

Put Option (PE): Right to sell.

Key Terms in Options:

Strike Price: Pre-decided price at which option can be exercised.

Premium: Price paid by buyer to seller of option.

Option Buyer: Has rights, limited risk (loss = premium).

Option Seller (Writer): Has obligation, unlimited risk but limited profit (premium received).

Example of Call Option:

Reliance at ₹2,500.

You buy a Call Option (CE) 2600 strike, expiring in 1 month, paying ₹20 premium.

Lot size = 250. Total premium paid = ₹5,000.

If Reliance goes to ₹2,700 before expiry:

Option value = ₹100 (intrinsic value).

Profit = (100 - 20) × 250 = ₹20,000.

If Reliance stays below ₹2,600, option expires worthless.

Loss = only premium paid (₹5,000).

So, options limit risk for buyers but sellers face higher risk.

Part 4: Comparison – Futures vs Options
Feature Futures Options
Obligation Buyer & seller both obligated Buyer has right, seller has obligation
Risk High (both sides) Limited for buyer, unlimited for seller
Cost Margin required Premium required
Profit Potential Unlimited both ways Unlimited for buyer, limited for seller
Best for Speculation & hedging Hedging, speculation, income strategies
Part 5: Why Trade F&O?
1. Hedging

Investors use F&O to protect portfolios from adverse price movements.
Example: An investor holding Reliance shares can buy a Put Option to protect against downside.

2. Speculation

Traders use leverage to bet on market movements.

3. Arbitrage

Taking advantage of price differences between cash market and F&O.

4. Income Generation

Selling (writing) options to earn premium.

Part 6: Important Concepts in F&O

Leverage & Margin – You control large value with small capital.

Mark-to-Market (MTM) – Futures contracts are settled daily.

Time Decay (Theta) – Options lose value as expiry nears.

Implied Volatility (IV) – Measures expected price swings.

Greeks in Options – Delta, Gamma, Vega, Theta, Rho – help manage risk.

Part 7: Common F&O Strategies
Futures Strategies:

Long Futures – Buy if you expect rise.

Short Futures – Sell if you expect fall.

Options Strategies:

Covered Call – Hold stock + sell call.

Protective Put – Hold stock + buy put (insurance).

Straddle – Buy call + buy put (expect big move).

Strangle – Buy out-of-money call & put.

Iron Condor – Combination to earn premium in sideways market.

Part 8: Risks in F&O Trading

High Leverage Risk – Small moves can wipe out capital.

Time Decay in Options – Value erodes with time.

Volatility Risk – Sudden moves may cause losses.

Liquidity Risk – Some contracts have low trading volume.

Psychological Pressure – High stress and emotions.

Part 9: F&O in India

Introduced in 2000 (NSE).

Most popular: Index Futures & Options (Nifty, Bank Nifty).

Also available: Stock futures, stock options, currency derivatives, commodity derivatives.

Regulated by SEBI (Securities and Exchange Board of India).

Lot Sizes in India

Each F&O contract has a fixed lot size decided by SEBI (e.g., Nifty lot = 50 units).

Expiry Cycle

Index Options: Weekly & monthly expiry.

Stock Options: Monthly expiry.

Part 10: Psychology of F&O Trading

Success in F&O is not just about knowledge, but also about mindset:

Discipline – Stick to stop-loss and plan.

Patience – Wait for right setup.

Emotional Control – Don’t let greed/fear drive decisions.

Risk Management – Never risk more than 1–2% of capital in one trade.

Conclusion

Futures & Options (F&O) trading is a double-edged sword. It offers leverage, hedging, and high profit potential, but also comes with complexity and high risk.

For beginners:

Start with options buying (limited risk).

Learn basic strategies like covered call, protective put.

Always use stop-loss.

Treat F&O as a tool for hedging first, speculation second.

With proper knowledge, discipline, and risk management, F&O can become a powerful addition to an investor’s toolkit.