What are Futures and Options?

Understanding F&O Meaning in Detail: What is F&O?

Futures and Options are exchange-traded derivatives that derive value from an underlying asset.

A futures contract includes buying or selling an underlying asset at a specific price on a predefined date. Buying a futures contract means committing to paying the fixed cost of the purchase at a given time. Selling a futures contract means transferring the asset to the buyer at a specific price at a particular time. The underlying holdings of futures contracts mainly consist of stocks, indices, commodities, and currencies.

Options give the holder the right to buy or sell the underlying asset at a specified price. They can be call options or put options.

A call option gives the buyer the right to buy the underlying asset at a specified price (also called the strike price). With a call option, the seller has the right to demand the sale of the underlying asset, but the seller has only an obligation and no freedom. Here the rights belong to the buyer, and the seller is obliged to pay the premium price.

Difference between Futures & Options

Futures and Options Trading for Beginners

Here’s what futures and options are from a beginner’s perspective. 

1.    Futures are leveraged products that work on margins. It is noteworthy that the margins work similarly for losses as well.

2.    Buying options means limited risk, but you rarely make money. Many small F&O traders prefer to buy options as their risk is limited to the premium paid. Option sellers take more risks and earn more than option buyers more often. However, it is prudent to remember that there is limited risk when buying options.

3.    Options are asymmetrical, and that's the difference between FnO. However, the buyer's loss is limited to the premium, while the seller's loss can be unlimited.

4.    The futures margin may increase sharply during volatile times. Many believe that futures are more advantageous than spot buying because buying on margin gives you leverage. However, these margins can increase sharply during periods of volatility.
 

Types of Futures Contracts

In India, futures contracts are widely used by institutional players, proprietary traders, and increasingly, high-net-worth individuals for their precision in risk management. Here are the major types:

Index Futures

Derivative contracts based on indices like Nifty 50, Bank Nifty, or Fin Nifty. These are among the most liquid instruments in Indian markets, extensively used for directional and hedge trades.

Stock Futures

Contracts based on individual stocks such as Reliance, HDFC Bank, TCS, etc. These come with lot sizes prescribed by SEBI and are subject to physical settlement in many cases.

Currency Futures

Futures on currency pairs like USD/INR, EUR/INR, etc., traded on NSE and BSE. These are typically used for hedging forex exposure by corporates and import/export businesses.

Commodity Futures

Traded on MCX and NCDEX, these include contracts for gold, silver, crude oil, cotton, and more. Commodity futures are regulated by SEBI and offer a hedge against price volatility.

Interest Rate Futures (IRFs)

Less popular but available for hedging interest rate risks. Contracts are based on Government of India securities (e.g., 6-year, 10-year G-Secs).

Each of these futures contracts is standardised in terms of expiry, margin, and lot size, and is traded on regulated exchanges.
 

Types of Options Contracts

Options in India have gained significant popularity due to low capital requirements and the potential for defined-risk strategies. NSE has emerged as the world’s largest derivatives exchange by volume, largely due to options.

Here are the types of options:

Call Options (CE)

Gives the buyer the right to buy the underlying asset at a specified strike price on expiry. In India, these are used extensively for bullish strategies and spreads.

Put Options (PE)

Gives the buyer the right to sell the underlying asset at a specific strike price. Commonly used for hedging long stock positions or directional bearish trades.

Index Options

Options based on Nifty, Bank Nifty, and Fin Nifty are the most actively traded. India has introduced weekly options expiry, increasing trader flexibility.

Stock Options

Available on selected stocks with sufficient liquidity (as per SEBI norms). Examples include Infosys, HDFC Bank, and ICICI Bank. These now follow physical settlement on expiry, adding realism to positions.

Exotic Options (Not on Exchange)

While not exchange-traded, some institutional investors use exotic options (like barrier or binary options) through OTC (Over-the-Counter) mechanisms under RBI oversight.

India also sees widespread retail participation in option selling due to attractive premiums, though it carries significant risk without proper risk management.

Who should invest in Futures & Options?

Futures and options trading can be profitable, but it is also risky. Therefore, FnO has advantages and disadvantages. Various types of traders invest in FnO.

1.    Hedgers: They invest in a particular asset to protect themselves from price fluctuations of that specific asset.

2.    Speculators: A speculator invests only in securities to leverage price fluctuations. They try to anticipate price movements and profit from that movements. It is a personal choice, but leverage can magnify returns (and losses).

3.    Arbitrageurs: They seek to profit from price differentials in asset market conditions. They try to exploit the market’s inefficiency of any kind.

Examples of Options and Futures?

Example of Futures

Suppose someone wants to buy a January corn futures contract. They enter into a futures contract to buy 200 kgs of corn at an agreed price by the end of January 2023, regardless of the market price. The seller also agrees to sell these 200 kgs of corn at the agreed price. 

Both buyers and sellers are now obligated to buy or sell that 200 kgs of corn unless they deal with other buyers or sellers. Depending on the price fluctuations, the market would decide the profit or loss for the buyer/sellers.

Example of Options 

If 'A' buys a futures contract at Rs 920 and ‘B’ sells those futures, the transaction is symmetrical for both parties. If the price rises to 940, A earns 20 rupees, and B loses 20 rupees. The opposite happens when the stock price drops to Rs.900. However, ‘A’ has to pay a premium to avail of the right to buy at the pre-defined price. This premium can be the maximum loss to the buyer of the option. 

Risk Management in Futures and Options Trading

Risk management in futures and options trading is crucial for minimising potential losses. Key strategies include:

● Position Sizing: Limit exposure by only risking a small percentage of capital per trade.

● Stop-Loss Orders: Set predefined exit points to automatically close trades and limit losses.

● Diversification: Spread investments across various assets to reduce overall risk.

● Hedging: Use options or futures positions to offset potential losses in other investments.

● Leverage Control: Use leverage cautiously, as it can amplify both gains and losses.

Effective risk management ensures long-term sustainability by protecting capital and managing volatility.

Futures Options - Points to Remember

1.    F and O trading has an excellent profitability opportunity but risks huge losses for novice traders. Hence, the execution must be done with utmost care.

2.    F&O always trades with stop loss and profit targets. It applies to all leveraged positions.

3.    With FnO, keeping the cost in check is necessary. Constantly monitor costs incurred in F&O. If you think F&O brokerage fees and other charges are low, you might be mistaken. F&O has a higher turnover rate, although at a lower percentage than equities. 

F&O transactions include brokerage fees, GST, stamp duty, statutory duty, and STT, and this cost may add up to losing your pocket. Make sure the profit-to-transaction cost ratio is optimal.

4.    You can trade option chain even if you need to know the market's direction.. The ability to pursue directionless strategies is one of the most enduring features of the F&O market. Combine options and futures to trade directional markets. 

5.    Options help to profit in volatile or lacklustre markets. These aspects of options make more sense than using options instead of stock trading.
 

Conclusion

Futures and Options are integral to India's modern financial market framework, offering a dynamic blend of risk management, leverage, and strategic positioning. While futures provide linear exposure with obligations on both sides, options enable asymmetric opportunities with limited risk for buyers.

The growing sophistication of Indian market participants—from FIIs and DIIs to retail traders—has driven innovation in derivative products, enhanced liquidity, and improved market depth.

However, these instruments require a strong understanding of volatility, margining systems, and settlement procedures, particularly in India’s evolving regulatory environment. With SEBI continually upgrading framework norms and exchanges expanding offerings, F&O will only grow in relevance for both hedging and speculative use cases.

Mastery of these tools doesn’t just enhance portfolio performance—it enables more resilient, responsive, and professional-grade investing in the Indian markets.