F&O (Futures and Options) are derivative contracts — their value is derived from an underlying asset like Nifty 50, Bank Nifty, or individual NSE stocks. Futures obligate you to buy or sell at a fixed price. Options give you the right (but not obligation) to do so. Understanding the difference is essential before trading either instrument.
What Is a Derivative?
A derivative is a financial contract whose value is "derived" from an underlying asset. The underlying asset can be a stock index (Nifty 50), individual stock (Reliance, TCS), commodity (Gold, Crude Oil), or currency (USD/INR). You do not own the underlying — you own a contract based on its price movement.
Futures — The Obligation Contract
A futures contract is an agreement to buy or sell a specific underlying asset at a predetermined price on a specific future date (the expiry date). Both parties are obligated — the buyer must buy, the seller must sell.
- Nifty 50 Futures: One lot = 75 units of Nifty. If Nifty futures are at 24,000, one lot = ₹24,000 × 75 = ₹18,00,000 in value. But you only need to pay a margin of approximately ₹1,20,000–₹1,50,000 to hold one lot.
- Expiry: NSE has monthly futures (last Thursday of each month) and can have near, mid, and far month contracts open simultaneously.
- P&L: Every 1-point move in Nifty futures = ₹75 profit or loss per lot. A 100-point move = ₹7,500.
- Leverage: Futures provide significant leverage — the margin is much smaller than the contract value. This amplifies both gains and losses.
Options — The Right (Not Obligation)
An options contract gives the buyer the RIGHT but not the obligation to buy (Call option) or sell (Put option) the underlying at a strike price before or on expiry. The buyer pays a premium for this right. The seller receives the premium and takes on the obligation.
- Call Option (CE): Right to buy. Profitable when underlying goes UP.
- Put Option (PE): Right to sell. Profitable when underlying goes DOWN.
- Premium: The price of the option — what you pay to buy it. For a Nifty 24,000 CE with 1 week to expiry, premium might be ₹150. One lot = ₹150 × 75 = ₹11,250 total cost.
- Maximum loss for option buyer: Limited to premium paid. If you buy a ₹11,250 option, the most you can lose is ₹11,250.
- Maximum loss for option seller: Unlimited (for naked calls) or large (for puts). Option selling requires significant margin.
Futures vs Options — Key Differences
| Futures | Options (Buying) | |
|---|---|---|
| Obligation | Both parties obligated | Buyer has right, not obligation |
| Maximum loss (buyer) | Unlimited (theoretically) | Limited to premium paid |
| Margin required | High (~8–15% of contract value) | Only premium amount |
| Time decay effect | None | Hurts option buyer every day |
| Profit profile | Linear — 1:1 with underlying move | Non-linear — can be very large % gain |
Who Should Trade F&O in India?
SEBI has specific requirements for F&O trading in India:
- Must enable F&O segment with your broker (requires income proof)
- Minimum account understanding of derivatives is recommended
- Not suitable for beginners — understand equity delivery trading for at least 6–12 months first
The SEBI study finding: 89% of individual F&O traders lost money over 3 years. F&O is a zero-sum game where retail traders are competing against professional institutions with superior technology and information. Approach with extreme caution and only after developing proven profitability in simpler instruments first.
Read our complete Options Basics guide and Option Greeks guide first. Then paper-trade options for 30 sessions before using real money. The glossary has given you the vocabulary — now build the practical knowledge. Return to the Academy to continue your education.