Contents
Definition
Futures and Options (F&O) are exchange-traded derivative contracts whose value is derived from an underlying asset — equity index (Nifty 50, Nifty Bank, etc.), individual stocks (currently ~180 SEBI-approved stocks in NSE F&O segment), currency pairs, or commodities. A futures contract is an obligation to buy or sell the underlying at a fixed price on a future expiry date. An options contract is a right (not obligation) to buy (Call) or sell (Put) the underlying at a fixed strike price on or before expiry, for which the buyer pays a premium. F&O carries leverage which amplifies BOTH gains and losses. The SEBI study (July 2024) showed 89% of individual F&O traders incurred net losses over FY22–FY24. Source: SEBI Circular SEBI/HO/MRD/DP/CIR/P/2019/13; SEBI F&O Study July 2024.
How It Works Mechanically
Futures: You enter a contract to buy/sell 1 lot of Nifty 50 (25 units) at ₹22,500 (futures price) expiring on the last Thursday of the month. You pay no premium — instead you deposit initial margin (~12–15% of notional). Each day, the contract is marked-to-market (MTM): if Nifty futures close higher, your account is credited; if lower, debited. This daily cash flow is variation margin. If your account falls below maintenance margin, your broker issues a margin call. At expiry, the contract settles in cash at the final settlement price (cash-settled for index futures).
Options: You buy a Nifty 50 Call option with strike 23,000, expiry last Thursday of month, at a premium of ₹120/unit. Total cost = 120 × 25 = ₹3,000. Maximum loss = ₹3,000 (if Nifty stays below 23,000 at expiry). Break-even at expiry = 23,000 + 120 = 23,120. If Nifty expires at 23,500, intrinsic value = (23,500 − 23,000) × 25 = ₹12,500 profit (minus ₹3,000 premium = ₹9,500 net). Option sellers (writers) collect premium but face theoretically unlimited loss on Call writes and must post SPAN + exposure margin.
Expiry calendar: NSE weekly options (Nifty 50) expire every Thursday. Monthly contracts (all stocks and Nifty/BankNifty) expire on the last Thursday of the month. If Thursday is a holiday, expiry shifts to the preceding Wednesday. BankNifty moved to Wednesday expiry (effective Sep 2024). FinNifty and MidcapNifty have Tuesday expiry.
Margin framework: SEBI mandates SPAN (Standard Portfolio Analysis of Risk) margin + Exposure margin for all F&O positions. SPAN is risk-based (VaR at 99% confidence over 1-day horizon); Exposure adds a buffer (~3% for index, ~5% for stocks). Total upfront margin = SPAN + Exposure.
Cost Components
- Brokerage: ₹20/order (discount brokers) or up to 2.5% of premium value (full-service, SEBI cap).
- STT: Options buy: nil. Options sell at exercise/expiry: 0.125% on settlement value (ITM only). Futures sell: 0.0125% on notional. (Rates per Finance Act 2023.)
- Exchange charges: NSE equity derivatives ₹2/lakh turnover (post-Oct 2024 revised slab; check NSE circular for current rate).
- GST: 18% on brokerage + exchange charges.
- SEBI turnover charges: ₹1/crore.
- Stamp duty: 0.002% on buy-side for options; 0.002% for futures (Maharashtra rate; varies by state).
- Margin interest: Funded margin from broker attracts 12–18% p.a. interest.
Risk / Protection Rules
- SEBI position limits: Single entity cap at 20% of MWPL or 500 index lots. Monitored by NSE's surveillance system daily.
- OI ban: When aggregate OI exceeds 95% of MWPL for a stock, fresh positions are banned (existing can be closed only). Prevents excessive concentration.
- Eligible stock list: SEBI reviews the F&O-eligible stock list semi-annually. Stocks failing liquidity/market-cap criteria are removed; remaining open positions must be wound down.
- F&O carries leverage which amplifies BOTH gains and losses. The SEBI study (July 2024) showed 89% of individual traders incurred net losses in F&O over FY22–FY24, with median annual loss of ₹1.1 lakh for loss-makers. This is factual regulatory data.
Worked Example
Investor D is bullish on Reliance Industries (RIL). RIL at ₹2,800; lot size = 250; one futures lot notional = ₹7,00,000. Margin required ~15% = ₹1,05,000. D buys one RIL futures contract at ₹2,820 (futures price, higher than spot due to cost-of-carry). RIL rises to ₹2,900 on day 3. MTM credit: (2,900 − 2,820) × 250 = ₹20,000. D closes position. Net: ₹20,000 gain on ₹1,05,000 margin = 19% return in 3 days. However, if RIL had fallen ₹80, D would face a ₹20,000 loss and a potential margin call. This leverage effect is why F&O is classified as a high-risk product.
Caveats / Common Mistakes
- The SEBI July 2024 study documenting 89% retail loss rate is factual and should inform any decision to trade F&O.
- Options time decay (theta) erodes premium daily — buying options with distant strikes hoping for large moves is a statistically losing strategy for most retail buyers.
- Ignoring margin call notices can lead to forced broker liquidation of positions at worst-case prices.
- STT on exercised options at expiry is levied on full settlement value, not just the premium — a surprise cost for deep-ITM options holders who let positions expire.
See Also
Primary Source
MintByte (ARN-314872 / APMI APRN-01658) provides this glossary for educational purposes only. Nothing here constitutes investment advice, a recommendation to buy or sell any security, or a guarantee of returns. Equity and derivatives trading involves risk of loss. Consult a SEBI-registered adviser before making investment decisions.