Futures and Options are financial contracts that derive their value from an underlying asset, such as stocks, indices, commodities, or currencies.
- A futures contract is a binding agreement to buy or sell the underlying asset at a predetermined price on a specific future date. Both buyer and seller are obligated to fulfill the contract.
- An options contract gives the buyer the right, but not the obligation, to buy (Call) or sell (Put) the asset at a specified price before or on the expiry date. The seller of the option, however, is obligated to fulfill the contract if the buyer exercises it.
Both are classified as derivatives and are traded on regulated exchanges like the NSE or BSE in India.
Key Differences Between Futures and Options
| Feature | Futures | Options |
| Obligation | Buyer and seller must honor contract | Buyer has a right; seller has obligation |
| Upfront Payment | No premium; margin required | Buyer pays a premium; seller deposits margin |
| Risk Profile | Unlimited for both sides | Limited for buyer; potentially unlimited for seller |
| Profit/Loss | Linear based on price movement | Non-linear, based on premium and expiry price |
| Use Case | Hedging and speculation | Hedging, speculation, and income strategies |
Why Traders Use F&O – Hedging, Speculation, and Leverage
Futures and options serve three primary purposes in trading:
- Hedging: Investors use them to protect existing positions from price volatility. For example, a portfolio manager may buy a Put Option to limit downside risk.
- Speculation: Traders take directional bets on market movements, aiming to profit from short-term price changes with relatively small capital.
- Leverage: These instruments require only a fraction of the full value (margin or premium), amplifying both gains and losses. This appeals to active traders but also increases risk.
How to Start Trading Futures and Options
Open a Trading + Demat Account With F&O Enabled
To trade futures and options in India, you must have a trading and demat account with F&O capability enabled. Most brokers (like Zerodha, Upstox, Angel One, etc.) offer this through their platforms.
Once your account is opened, you need to:
- Submit income proof (bank statement, salary slip, or ITR)
- Sign a risk disclosure agreement specific to derivatives
- Activate F&O trading in your broker’s settings panel
- Wait for backend approval (usually 24–48 hours)
You cannot trade F&O until this activation is completed.
Minimum Capital and Margin Requirements
Futures and options do not require full contract value upfront. However, trading them still requires:
- Initial Margin for futures (ranges from ₹10,000 to ₹1,50,000 depending on asset)
- Premium for buying options (e.g., ₹1,000–₹15,000 for 1 lot)
- Span + Exposure Margin for selling options (can exceed ₹50,000)
These values change daily based on volatility and the contract being traded. You can check real-time margin requirements through your broker’s margin calculator.
How to Activate F&O With Your Broker (Zerodha, Upstox, etc.)
Here’s how most brokers handle F&O activation:
- Login to the web/app platform
- Navigate to the ‘Profile’ or ‘Console’ section
- Select ‘Activate F&O’ or ‘Enable Derivatives’
- Upload required documents (ITR, bank statement, payslip)
- Accept terms of the risk disclosure document
- Wait for confirmation
Each broker has minor variations, but the steps are broadly the same.
Where You’ll Trade: Dashboard, Order Book, MTM, Positions
Once activated, you’ll see F&O trading enabled in your dashboard.
- Order Book: Place limit, market, or stop-loss orders on options/futures
- Positions Tab: Shows live mark-to-market (MTM) gains/losses
- Margins Panel: Reflects blocked and available margin
- Contract View: Displays expiry, lot size, strike price, premium or futures price
You’ll be trading listed contracts, not underlying shares directly. Always confirm the lot size, expiry date, and strike or future price before placing an order.
How Futures Trading Works – With Real Examples
Futures Contract – Meaning, Buyers and Sellers Role
A futures contract is a legal agreement to buy or sell an asset at a fixed price on a future date. It is standardized and traded on exchanges like NSE.
- Buyer’s role: Obligated to buy the asset at expiry
- Seller’s role: Obligated to sell the asset at expiry
- No premium is paid upfront — only margin is required
- Trades are marked-to-market daily, meaning profit/loss is credited or debited every evening based on the price movement
- You can exit before expiry by squaring off your position
Futures are used to take leveraged positions without owning the actual asset.
Live Trade Example – Nifty Futures (Entry to Exit With P&L)
Let’s say you expect the Nifty index to rise.
- You buy 1 lot of Nifty Futures at ₹22,000
- Lot size = 50, so contract value = ₹11,00,000
- You pay an initial margin of approx ₹1,10,000 (10%)
- If Nifty rises to ₹22,300, you gain ₹300 × 50 = ₹15,000
- If it falls to ₹21,800, you lose ₹200 × 50 = ₹10,000
All gains/losses reflect in your MTM (Mark-to-Market) daily until you exit or it expires.
No premium involved, but losses can exceed margin if the market moves heavily against you.
Understanding MTM, Margin Calls, and Settlement
MTM (Mark-to-Market):
At the end of each trading day, your position is marked to the current market price. Gains are added to your account; losses are deducted.
Margin Call:
If your losses breach available margin, your broker may request additional funds. If not added in time, your position may be auto-squared off.
Settlement:
Futures in India are mostly cash-settled. If you hold till expiry, the profit/loss is settled in your account based on the final price — no delivery of assets.
How Options Trading Works – Explained Practically
Call vs Put Options – What You Need to Know
An option is a derivative contract that gives the buyer the right, not the obligation to buy or sell the underlying asset at a fixed price before expiry.
There are two types:
- Call Option: Right to buy the asset at a chosen price (strike price)
- Put Option: Right to sell the asset at a chosen price
Key terms:
- Premium: Upfront cost paid by the buyer
- Strike Price: The fixed price at which the option can be exercised
- Expiry Date: Last valid trading day of the contract
- Lot Size: Each option contract has a fixed quantity (e.g., 50 Nifty units)
Option buyers pay a premium and risk only that. Option sellers (writers) collect the premium but take on potential obligation and risk.
Buying a Call Option – Real Scenario and Break-Even
You believe Nifty will rise and buy a Nifty 22,000 Call Option:
- Premium: ₹120
- Lot Size: 50
- Total Cost: ₹120 × 50 = ₹6,000
- Break-Even Point: ₹22,000 + ₹120 = ₹22,120
If Nifty rises to ₹22,300 before expiry:
- Intrinsic Value = ₹300
- Profit = ₹300 – ₹120 = ₹180 × 50 = ₹9,000
If Nifty stays below ₹22,000:
- Option expires worthless
- Loss = Premium paid = ₹6,000
Buyers can lose only the premium but gain significantly if the move is strong.
Selling Options – Margin, Premium, Risk
When you sell (write) an option:
- You receive the premium upfront
- Must keep margin with the broker
- If the market moves against you, losses can be large
Example: You sell a 22,000 Call Option at ₹120, and Nifty closes at ₹22,300:
- You owe ₹300 to the buyer
- Net loss = (₹300 – ₹120) × 50 = ₹9,000
Selling options requires more capital and risk tolerance but is popular for income strategies.
Sellers benefit from time decay and sideways markets, but face unlimited loss if not hedged.
What Happens on Expiry (Buyer and Seller Outcome)
At expiry:
- If In-The-Money (ITM): Buyer gets intrinsic value, seller pays it
- If Out-of-The-Money (OTM): Option expires worthless
- Most options are settled in cash, not delivery
- No action required by buyer/seller if not squared off — automatic settlement happens
Example Outcomes:
- Buyer of 22,000 Call, market at 22,300 → ₹300 profit
- Seller of same call → ₹300 loss minus premium received
- Buyer of 22,500 Call, market at 22,300 → worthless
Understanding expiry behavior is critical — many losses occur due to last-day volatility or inaction.
Understanding Option Greeks (Made Simple)
While beginners can start trading options without complex math, understanding a few key metrics called “Greeks” can significantly improve decision-making.
- Delta shows how much the option premium moves for every ₹1 change in the underlying asset. A Delta of 0.6 means the option price will increase by ₹0.60 for every ₹1 rise in stock price.
- Theta measures time decay — how much value the option loses each day as it nears expiry.
- Vega indicates how sensitive the premium is to changes in volatility.
These Greeks are visible on most broker platforms and can help you choose better strikes, exits, or even build hedged strategies.
Should You Trade Futures or Options? (Practical Comparison)
Side-by-Side Comparison of Key Features
| Criteria | Futures | Options |
| Obligation | Yes – both buyer and seller must execute contract | No – only seller is obligated, buyer has the right |
| Upfront Cost | No premium, but margin required | Buyer pays premium; seller provides margin |
| Risk Exposure | Unlimited for both sides | Limited for buyer; unlimited for seller |
| Profit/Loss Structure | Linear – profit/loss moves with price | Non-linear – depends on strike, premium, and expiry |
| Best For | Directional bets with leverage | Directional moves, income strategies, volatility trades |
| Time Sensitivity | Not affected by time | Time decay (theta) reduces value daily |
| Ease of Exit | Easy before expiry | Buyer can exit easily; seller needs active margin management |
When to Choose Futures Over Options
Futures are suitable when:
- You are confident in strong directional movement
- You can monitor and manage unlimited risk
- You prefer linear profit/loss tracking
- You have enough capital to maintain margin and withstand MTM swings
Example: Intraday or swing traders betting on Nifty or Bank Nifty levels.
When to Use Options Instead of Futures
Options work better when:
- You want to limit risk to premium paid
- You expect volatility but not necessarily a big move
- You want to hedge existing positions
- You want to earn passive income by selling options (covered call, etc.)
Example: Buying Put options to protect a long stock portfolio.
How Real Traders Use Futures and Options (With Trade Setups)
Using Index Options to Hedge a Portfolio
If you hold a portfolio of large-cap stocks and fear a short-term market dip, you can buy Put Options on Nifty or Bank Nifty.
Example:
- Portfolio value: ₹10 lakhs
- Buy Nifty 21,800 Put at ₹120 (lot size = 50)
- Cost = ₹6,000 (₹120 × 50)
- If Nifty drops sharply, the put gains and offsets stock losses
- If market rises, option expires worthless — portfolio gains anyway
Hedging is an insurance strategy — not for profits but for protection.
Taking Directional Bets With Futures (Leverage Use Case)
Let’s say you expect Reliance to rise over the next few days:
- Current price = ₹2,500
- Buy 1 lot of Reliance Futures at ₹2,500
- Lot size = 250 → contract value = ₹6,25,000
- Margin required = ₹90,000 (approx)
- If price moves to ₹2,540 → profit = ₹10,000
- If it drops to ₹2,460 → loss = ₹10,000
This is pure speculation using leverage — high risk, high reward.
Earning Passive Income With Covered Calls
If you own shares and want to earn extra income, sell call options against them.
Example:
- You hold 1 lot of Infosys (300 shares)
- Sell 1 lot of Infosys 1,500 Call Option at ₹25
- Premium received = ₹7,500
- If stock stays below ₹1,500 → you keep full premium
- If stock rises above ₹1,500 → you deliver shares at a profit
This strategy earns passive income in flat or mildly bullish markets.
Combining F&O – Protective Puts and Bull Call Spreads
You can use both products together for safer trades:
- Protective Put:
Buy stock + buy Put option → limits downside - Bull Call Spread:
Buy a lower strike Call, sell higher strike Call → reduces premium cost
Real F&O Trade Examples With P&L Outcomes
Bullish Futures Trade – From Entry to Exit
Setup: Trader expects Nifty to rise after strong global cues.
- Buys 1 lot of Nifty Futures at ₹22,100
- Margin used = ₹1.1 lakh
- Price moves to ₹22,400 within 2 days
- Trader exits trade
P&L Calculation:
- Gain = ₹300 × 50 (lot size) = ₹15,000
- Return on margin = 13.6% in 2 days
- If Nifty had dropped to ₹21,800 → loss = ₹15,000
Futures amplify gains and losses. Margin discipline is key.
Option Buyer Holding Till Expiry (Profitable Outcome)
Setup: Trader buys Bank Nifty 48,000 Call at ₹200 (lot size = 15).
- Total premium paid = ₹3,000
- On expiry, Bank Nifty closes at 48,500
- Intrinsic value = ₹500
- Net profit = (₹500 – ₹200) × 15 = ₹4,500
Maximum loss was capped at ₹3,000, but upside potential remained.
Option Seller Facing Loss (No Hedge)
Setup: Trader sells Reliance 2,600 Call at ₹40 (lot size = 250)
- Premium received = ₹10,000
- Stock rallies to ₹2,700
- Intrinsic loss = ₹100 × 250 = ₹25,000
- Net P&L = ₹25,000 – ₹10,000 = ₹15,000 loss
Option selling without protection exposes unlimited risk.
Intraday F&O Scalping With Tight Stop
Setup: Trader sees a breakout in Infosys Futures intraday
- Buys at ₹1,480, sets stop-loss at ₹1,470
- Lot size = 300
- Price hits ₹1,495 → exits
P&L Calculation:
- Profit = ₹15 × 300 = ₹4,500
- Risked ₹10 × 300 = ₹3,000
- Risk-reward = 1:1.5, completed within 45 mins
Scalping in F&O works with strict stops and fast execution.
These spread strategies balance profit potential with risk limits.
Common Pitfalls in Futures and Options Trading (What to Avoid)
Misjudging Leverage in Futures Trading
Futures require only a small margin, but you’re exposed to the full contract value.
- Traders often confuse margin with maximum risk
- A ₹1 lakh margin can control ₹6 lakh worth of exposure
- A 2% move = ₹12,000 gain or loss
- Without stop-loss, small moves become big damage
Leverage magnifies everything — both profits and panic.
Ignoring Theta Decay in Options Buying
Option buyers often hold positions too long, unaware of time decay.
- Each day closer to expiry, option premium drops (especially if OTM)
- Even if the stock moves a bit, decay might eat profits
- Week of expiry = rapid decay phase
Buy options only when you expect fast, directional moves.
Selling Options Without a Hedge
New traders are lured by premiums from option selling — but:
- Unlimited loss if market moves sharply
- Margin calls if MTM loss exceeds capital
- No protection = emotional exits at worst levels
Use spreads or buy protection when selling options.
Overtrading – Too Many Positions, Too Little Logic
- Taking multiple F&O trades to “recover losses”
- Holding too many open contracts without a plan
- Ignoring position sizing rules
Overtrading in F&O quickly leads to capital erosion.
Not Exiting Before Expiry or Mismanaging Settlement
- Many beginners don’t square off F&O trades before expiry
- Options can expire worthless despite strong moves (if OTM)
- Futures may cause delivery obligation (in stock futures)
Know expiry dates. Square off or roll forward actively.
Practice F&O Trading Without Risk (Demo Tools)
If you’re not yet ready to risk real money, start by paper trading — simulating trades with real market data but zero capital exposure.
Platforms like Sensibull (via Zerodha or Upstox) allow you to test F&O strategies in live conditions.
FAQs
Q1. Is Futures and Options Trading Good for Beginners?
F&O trading isn’t beginner-friendly by default. It involves leverage, margin, and time-sensitive decisions. Beginners should:
- Start with small lots of paper trading
- Understand risk per trade
- Avoid option selling without hedging
- Focus first on learning, not earning
Learn the mechanics before using real capital.
Q2. Can I Trade F&O With Small Capital?
Yes — but your risk per trade must be limited.
- Nifty options can cost as little as ₹1,500–₹3,000 per lot (as buyer)
- Stock futures need margin of ₹30,000–₹1.5 lakh per lot
- Start with options buying and build confidence
Small capital = small risk. Avoid overleverage.
Q3. What Happens If I Don’t Square Off My F&O Trade?
- Futures: Automatically settled on expiry. For stocks, may lead to physical delivery if not squared off
- Options: If ITM, settled in cash or delivery; OTM options expire worthless
- Charges apply if you hold beyond expiry
Always check your broker’s F&O expiry policy.
Q4. Can I Trade Options Without Trading Futures?
Yes. Options and futures are independent instruments.
- You can trade only options (buy or sell)
- Many traders use index options exclusively
- No need to trade futures unless strategy demands it
Use the product that matches your capital and strategy.
Q5. Is Margin Required for Both Futures and Options?
- Futures: Margin required for both buyer and seller
- Options:
- Buyers: Pay only premium (no margin)
- Sellers: Must maintain margin with broker
Understand your broker’s span + exposure margin rules before placing trades.
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