F&O

Futures and Options (F&O) are exchange-traded derivative contracts whose value is derived from an underlying asset — typically a stock, index, currency or commodity. They allow leveraged exposure with a fraction of the capital required for cash-market positions.

Mechanics: A Future obligates both parties to transact at a pre-agreed price on the expiry date. An Option gives the buyer the right (not obligation) to buy (Call) or sell (Put) at a strike price, in exchange for a premium paid upfront.

Example: Nifty 50 spot at 22,000. A 22,100 Call expiring next week is quoted at Rs 80 (lot size 25, so one contract costs Rs 2,000 premium). If Nifty closes at 22,300 on expiry, the Call is worth Rs 200, a 150% return on premium. If it closes below 22,100, the entire Rs 2,000 is lost.

When to use: Hedging an existing equity portfolio against a known event (budget, election, RBI policy); generating yield via covered-call writing on long holdings.

When NOT to use: As a primary speculation vehicle for retail. SEBI 2024 study: 93% of individual F&O traders lost money over FY22-FY24, average loss Rs 2 lakh per trader.

Caveat: F&O is high-risk and not suitable for most retail investors. Past performance is not indicative of future returns.

Related terms: Beta, Standard Deviation, STT.