What is the main purpose of futures and options trading?

Futures and options are used for hedging risk, speculating on price movements, and improving portfolio efficiency without owning the underlying asset directly.

Why do futures require margins instead of full payment?

Margins allow traders to control large contract values with smaller capital, while exchanges use them to manage risk and ensure financial discipline.

What happens if I do not close a futures position before expiry?

If you do not close, the settlement of the contract happens according to exchange rules, usually through cash settlement or compulsory physical settlement, depending on the instrument.

What is the regulatory framework for F&O trading in India?

In India, futures and options trading is regulated by SEBI and conducted on recognised exchanges like NSE and BSE. Strict margin requirements, daily settlement, and risk management systems are in place to protect market participants.

Is option buying safer than option selling?

Buying options is generally safer because of the limit on losses in comparison to the premium, while option selling can result in significantly higher losses.

Can futures and options be used together?

Yes, traders often combine futures and options to create strategies that balance risk and reward, such as spreads, hedges, and income-generating setups.

What role does volatility play in options pricing?

Higher volatility increases option premiums because larger price swings raise the probability of the option finishing profitably before expiry.

Everything to Know About Futures and Options

The Indian financial landscape has undergone a seismic shift, with the derivatives segment now dominating the traditional cash market.

This exponential growth highlights that Futures and Options (F&O) are no longer just tools for institutional hedging; they have become the primary vehicle for Indian traders seeking market exposure.

In this guide, we will break down the core fundamentals of F&O, explore how leverage works, and analyse the essential risks every beginner must navigate.

What are Derivatives?

Futures and options are two major kinds of derivatives. Derivatives are financial contracts whose value is derived from an underlying asset. The underlying asset can be:

Stocks
Stock indices
Commodities
Currencies
Interest rates

For example, gold is an asset, and its value can rise as well as fall. So, if we make a contract on its value, that particular contract will be the derivative. The value of that derivative will behave in the same way as the asset itself. This, in turn, means if the price of gold goes up, its derivative value will go up and vice versa.

There are 4 major types of derivatives:

Forward
Futures
Options
Swaps

Futures and options are the most popular types of derivatives, as they can be traded on the exchange.

What is the Need for Derivatives?

Derivatives are vital because they allow participants to transfer risk to those willing to take it. Depending on your financial goal, you might use derivatives for these two primary reasons:

Hedging

Investors hedge and take a position to reduce their losses. They use F&O to protect their portfolios from adverse price movements in case they have also invested in the asset or the commodity itself.

For example, if you own 100 shares of a company and fear the price might drop, you can buy a Put Option or sell a Futures contract. If the stock price falls, the profit from your derivative will offset the loss in your actual shares, keeping your total capital stable.

Speculation

Traders attempt to profit from short-term price movements. Traders primarily speculate to make a profit instead of minimising the losses.

Unlike hedgers, speculators are "risk-seekers." They use the leverage provided by F&O to control large positions with small amounts of capital. If a trader believes the Nifty 50 will rise 2% this week, they may buy Call Options to amplify their returns.

What are Futures?

A futures contract is a legally binding agreement to buy or sell an underlying asset at a predetermined price on a specified future date. Both the buyer and the seller are obligated to honour the contract at expiry.

Key Characteristics of Futures

Obligation: Both parties must execute the contract.
Standardisation: Contract size, expiry, and terms are fixed by the exchange.
Margin-Based Trading: Traders pay only a fraction of the contract value as margin.
Mark-to-Market (MTM): Profits and losses are settled daily.

What are Options?

An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price (called the strike price) on or before a certain date.

Unlike futures, the obligation in options lies only with the seller (writer) of the contract.

Types of Options

Call Option: Gives the buyer the right to buy the asset. You buy a call when you expect the market to go up (Bullish).
Put Option: Gives the buyer the right to sell the asset. You buy a put when you expect the market to go down (Bearish).

Key Characteristics of Options

Premium: This is the "fee" the buyer pays upfront to the seller.
Limited Risk for Buyer: Loss is limited to the premium paid.
Unlimited Risk for Seller: Potential losses can be substantial.
Time Sensitivity: Option value decreases as expiry approaches (time decay).

Futures vs Options: Key Differences

After understanding the meaning of futures and options trading, let us explore their differences. The table below presents the key differences between futures and options:

Feature	Futures	Options
Obligation	Mandatory for both parties	Only the seller has the obligation
Upfront Cost	Margin required	Premium paid by the buyer
Risk	Unlimited profit and loss	Limited loss for the buyer
Complexity	Relatively simpler	More complex
Time Decay	Not applicable	Yes

Know more about the difference between options and futures here.

How Futures and Options Are Traded?

Futures and options are traded on recognised exchanges through a trading account on a third-party fintech app like Sahi. After you open a trading account, you can buy a futures and options contract.

Every F&O contract is predefined by the exchange to ensure liquidity:

Fixed Lot Sizes: You cannot trade single units. For example, as of January 2026, the Nifty 50 lot size is 65, and the Bank Nifty lot size is 30. You must trade in multiples of these numbers.
Standard Expiry Dates: Contracts have specific life spans. Weekly expiries (Tuesdays for Nifty 50 on NSE and Thursdays for Sensex on BSE) are popular for short-term trades, while monthly expiries occur on the last Tuesday of the month for NSE contracts and the last Thursday for BSE contracts.
Strike Prices: For options, the exchange provides a "chain" of prices above and below the current market rate, allowing you to choose your entry point.
Initial Margin: A deposit required to open a position, calculated dynamically by NSE's VaR (Value at Risk) model based on the contract and prevailing market volatility.
Additional Expiry Margin: As per SEBI's 2024-25 circular, an additional 2% ELM (Extreme Loss Margin) is levied on short options contracts on expiry days to cover tail risk.
Squaring Off: Most retail traders exit their position before the expiry date to book their profit or loss in cash.

Final Settlement: If you hold until the very end:

Index F&O (Nifty/Sensex): These are cash-settled. The difference between your entry price and the closing price is adjusted in your account.
Stock F&O: These are physically settled. If your stock option expires "In-the-Money" (ITM), you must either take delivery of the actual shares (requiring 100% of the cash) or give delivery (requiring you to own the shares).

Note: Traders can close their positions before expiry or allow them to expire or settle as per exchange rules.

What are the Risks Involved in Futures and Options Trading?

While F&O can be profitable, they carry significant risks. Some of those risks are listed below:

F&O trading usually involves high leverage, which may amplify losses.
Market volatility can lead to rapid capital erosion.
Option sellers generally face unlimited risk.
Time decay may impact option buyers negatively.
When one trades futures and options, profit and loss may emotionally influence the decisions of traders.

Pro-Tip: The "1% Rule" — To manage these risks, professional traders never risk more than 1% of their total trading capital on a single trade. This ensures that even a string of losses will not put you out of the game.

Bottom Line

Futures and options are powerful financial instruments that offer opportunities for hedging, speculation, and advanced trading strategies. However, their complexity and risk make them unsuitable for casual or uninformed participation. So, you should get a strong understanding of how these instruments work, along with disciplined risk management, before investing!

Futures and options risk management might seem like hefty work. But with Sahi at your side, you do not need to worry about it. Its advanced charts can help you in technical analysis of any contract and save you from investment risk!

Understanding the Fundamentals of Futures and Options