Futures and options explained
F&O - futures and options - are the derivatives most Indian traders use. Here is what a derivative is, how a NIFTY future works with margin and daily settlement, and how futures differ from options.
- What derivatives are and why traders use them
- How a NIFTY future works - margin, MTM and expiry, with a payoff you can move
- Futures vs options, and how F&O is settled in India
What are derivatives?
A derivative is a contract whose value is derived from something else - the underlying. The underlying can be an index like NIFTY, a share like Reliance, a commodity like crude oil or a currency like USD/INR. The contract has a fixed expiry date and trades in fixed lots.
Traders use derivatives for three things:
Hedging
Protecting a portfolio - for example buying NIFTY puts or selling NIFTY futures before an event.
Trading a view
Taking a position on direction or volatility with less capital than buying the underlying.
Arbitrage
Capturing small price differences between the cash and futures markets.
How futures work
A futures contract is an agreement to buy or sell the underlying at a fixed price on the expiry date. Both sides are obliged to settle, so profit and loss move one to one with the price - there is no premium and no cap.
Example. NIFTY futures are at 22,500. You buy one lot (65 units), a contract worth about ₹14,62,500. You don’t pay that in full - you put up margin, a fraction of the value set by the exchange.
- NIFTY rises 200 points to 22,700: profit = 200 × 65 = ₹13,000.
- NIFTY falls 200 points to 22,300: loss = ₹13,000 - the same size the other way.
Every point is worth ₹65 per lot, in either direction. A seller (short future) has the mirror image: profit when NIFTY falls, loss when it rises.
Margin
Exchanges set an initial margin (SPAN plus exposure), often around 10-15% of the contract value for index futures. Check any position in the margin calculator.
Mark-to-market (MTM)
Futures P&L is settled every day. Losses are debited at the day’s close, so a losing position can need extra margin long before expiry.
See where traders are adding futures positions on the NIFTY open interest page, and the dates on the expiry calendar.
How options work, in brief
An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) at a fixed strike price until expiry. The buyer pays a premium and can lose at most that premium; the seller collects the premium and takes on the obligation.
Call option
Right to buy. Gains when the price rises above strike + premium.
Put option
Right to sell. Gains when the price falls below strike − premium.
Go deeper: options trading for beginners and call and put options, with payoff charts.
Futures vs options
| Futures | Options (buyer) | Options (seller) | |
|---|---|---|---|
| Right or obligation | Obligation, both sides | Right | Obligation |
| Upfront cost | Margin | Premium | Margin |
| Maximum loss | Open-ended | Premium paid | Large, unless hedged |
| Maximum profit | Open-ended | Large | Premium received |
| Time decay | None | Works against you | Works for you |
| P&L vs price | One to one | Non-linear | Non-linear |
F&O in India
- Where: NSE (NIFTY, Bank Nifty, Fin Nifty, Midcap Nifty and about 200 stocks) and BSE (Sensex, Bankex). Commodities trade on MCX.
- Since when: index futures started in 2000 and index options in 2001, followed the same year by stock options and stock futures.
- Settlement: index F&O is cash settled. Stock F&O held to expiry is physically settled - you take or give delivery of the shares.
- Expiry: every contract has a fixed expiry; NIFTY has weekly and monthly expiries (calendar), and lots are revised by the exchange (lot sizes).
- Trading hours: equity F&O trades from 9:15 am on market days.
The risks of F&O
Most F&O traders lose money. SEBI’s study of FY22 to FY24 found that about 9 in 10 individual traders made a loss. Learn first, size small and know your maximum loss before every trade.
- Leverage: a small margin controls a large contract, so small moves mean big swings in your account.
- Daily MTM: futures losses are taken every day; a gap against you can wipe out the margin.
- Physical settlement: stock positions left open at expiry can turn into a delivery obligation.
- Unhedged option selling: a sharp move can cost many times the premium collected.
Frequently asked questions
What are derivatives?
A derivative is a contract whose value comes from something else - an index, a share, a commodity or a currency. In India the most traded derivatives are futures and options (F&O) on NIFTY, Bank Nifty, Sensex and about 200 stocks.
What is the difference between futures and options?
A future is an obligation: both sides must settle at expiry, and profit and loss move one to one with the price. An option gives the buyer a right without an obligation: the buyer pays a premium and can lose at most that premium, while the seller takes the obligation.
How much margin is needed for NIFTY futures?
Margin is a percentage of the contract value, often around 10-15% for index futures and set daily by the exchange. With NIFTY at 22,500 and a lot of 65, one lot is worth about ₹14,62,500. Check the exact figure in the margin calculator.
What is mark-to-market (MTM)?
Futures profits and losses are settled every day: at the end of each day your account is credited or debited with that day’s gain or loss, so a losing position may need more margin before expiry.
Are F&O contracts cash settled in India?
Index futures and options (NIFTY, Bank Nifty, Sensex) are cash settled. Stock futures and options held to expiry are physically settled - you give or take delivery of the shares.
Is F&O trading risky?
Yes. SEBI’s study of FY22 to FY24 found that about 9 in 10 individual F&O traders lost money. Learn the basics, start small and always know your maximum loss.
More learning guides
For education only; not investment advice. Derivatives trading carries substantial risk. Disclaimer