Futures & Options

What are Futures?

Think of a Future as a binding promise.

• You agree to buy (or sell) something at a fixed price on a specific date in the future.
• Example: You "promise" to buy 100 shares of Reliance at ₹3,000 next month. Even if the price jumps to ₹3,500, you still get them for ₹3,000. But if the price drops to ₹2,500, you still have to buy them at ₹3,000. You are locked in.

What are Options?

Think of a Future as a binding promise.

• You agree to buy (or sell) something at a fixed price on a specific date in the future.
• Example: You "promise" to buy 100 shares of Reliance at ₹3,000 next month. Even if the price jumps to ₹3,500, you still get them for ₹3,000. But if the price drops to ₹2,500, you still have to buy them at ₹3,000. You are locked in.

What is the difference between Futures and Options?

Feature

Futures

Options

Obligation

You must complete the trade.

You have a choice.

Risk

High (Unlimited loss potential).

Limited (Only the fee/premium paid).

Upfront Cost

Large (Margin money).

Small (Premium fee).

What is the Futures & Options (F&O) Market?

This is a special section of the stock market (like NSE or BSE) where you don't buy "real" shares to keep in your cupboard. Instead, you trade contracts based on the price of those shares. It’s often called the Derivatives Market because the value "derives" from the actual stock price.

How does it work? (Contract, Expiry, Settlement)

• Contract: The agreement (e.g., "Nifty Jan Future").

• Expiry: Every contract has an "end date." In India, stock and index contracts usually expire on the last Thursday of the month.

• Settlement: On the expiry day, the profit or loss is calculated.

  • Indices (Nifty/Bank Nifty): Settled in Cash (profit/loss added or cut from your account).
  • Stocks: Usually involves Physical Delivery (you actually have to buy/sell the real shares if you hold until the very end).

What are the risks in F&O?

• Leverage: You can control ₹10 Lakhs worth of stock with only ₹2 Lakhs. This is great for profits but deadly for losses—you can lose your entire capital in hours.
• Time Decay (for Options): Options are like ice cubes. Every day that passes, the "time value" melts away. If the stock price doesn't move quickly, your option value drops to zero.

What are the types of Options?

• Call Option (CE): Buy this if you think the market will go UP.
• Put Option (PE): Buy this if you think the market will go DOWN.

What are the trading hours?

Same as the regular stock market: 9:15 AM to 3:30 PM, Monday to Friday.

What is an Options Premium?

This is the price/fee you pay to buy an option. It is the only thing a buyer can lose. It’s determined by the stock price, time left for expiry, and how "wild" (volatile) the market is.

What is a Strike Price?

The Strike Price is the specific price at which you are agreeing to buy or sell the stock.

Example: If Reliance is at ₹3,050, you might choose a "Strike Price" of ₹3,100 to bet that it will cross that mark.

What is Margin in F&O?

Margin is a security deposit you give to the broker. Since F&O involves large values, the broker keeps this money to ensure you can cover potential losses. For Futures, this is usually 10-20% of the total value.

Can I exit before Expiry?

Yes! Most traders buy at 10:00 AM and sell at 11:00 AM. You don't have to wait until the last Thursday of the month. You can "square off" (exit) your position any time the market is open.

Do they expire every month?

Yes. In India:

• Monthly Contracts: Expire the last Thursday of the month.
• Weekly Contracts: (Mostly for Nifty/Bank Nifty) Expire every Thursday.

Can beginners trade in F&O?

Technically, yes, but be very careful. SEBI recently reported that 9 out of 10 individual traders lose money in F&O. It is highly recommended to learn with "Paper Trading" (virtual money) before using real cash.

What is Lot Size in F&O?

You cannot buy just 1 share in F&O. You must buy in bundles called "Lots."

• Example: The lot size for Nifty is 50. So, if you trade Nifty, you are trading 50 units at a time. Every ₹1 move in Nifty equals a ₹50 gain or loss for you.