October 31, 2025
4 mins read
Trading in futures and options, commonly known as [translate:F&O], is based on a simple concept: these are contracts whose value is derived from an underlying asset, such as shares, gold, or stock indices like Nifty and Sensex.
Unlike regular share trading, where investors buy or sell the actual shares directly, [translate:F&O] trading involves dealing with contracts linked to these assets. These contracts allow traders to speculate on price movements, hedge existing positions, or gain exposure to large positions with relatively smaller capital.
Understanding how [translate:F&O] works is essential for effective trading and risk management strategies.
Futures are agreements where two people decide today on a price at which they will buy or sell something on a future date. For example, if you agree to buy wheat at ₹2,000 per quintal next month, that is a futures contract.
Both sides must keep their promise, no matter how the price changes later. Options are different because they give you a choice. If you buy an option, you have the right to buy or sell at a fixed price, but you don’t have to if you don’t want to.
For example, you may buy the option to purchase Infosys shares at ₹1,500. If the market goes up, you can exercise the option. If it goes down, you can just let the option expire.
In India, futures and options are traded on stock exchanges such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). Commodities such as oil and gold are traded on exchanges like the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).
Trading in futures and options is not as hard as it first looks, but it requires some preparation. Here are the main steps broken down into more basic terms:
You will need to work with a broker registered with NSE or BSE that offers futures and options facilities. You wouldn’t be able to trade in [translate:F&O] without Open a trading account.
When you trade futures, you will have to maintain some money with your broker as the margin. This is only a portion of the total value of the contract.
With options, you pay a premium to buy the contract and everything is done with leverage, too, so your profits and losses can be larger than your original investment.
Before entering into any trade, you will want to do your research. Look at the market, the charts, the results of the company, and news updates. Both fundamental analysis and technical analysis can be helpful before you make a trade.
The strike price in options is very important. That is the price you can buy or sell at if you choose to exercise your option. A correctly chosen strike price will put the odds more in your favor for a respectable profit.
Option chains show a summary of all strike prices, premiums, and expiry dates. You have to pay attention to these when you plan your trades.
Once you have selected your contract, you simply place the order through your brokers platform.
By following these steps carefully, you can start trading in [translate:F&O] in a safe and informed way.
Every futures and options contract has an expiry date. This is the last day on which the contract is valid. In India, stock futures and options expire on the last Thursday of each month. If that Thursday is a holiday, expiring day shifts to the previous trading day.
Once a futures contract expires, it is either settled in cash or delivered. In the case of options, if the price has not moved in your favour it might expire worthless. This is why traders like to close their positions before expiry.
Expiry also brings more price swings, as many traders adjust their positions on the last few days. Understanding how expiry works helps you avoid sudden surprises.
Risk management is perhaps an important part of [translate:F&O] trading. While these contracts are often used to reduce risk, careless use can increase it.
Suppose you have a futures contract to buy shares at ₹100 on 31st August. Even if the price falls to ₹80, you still must buy at ₹100. That means a clear loss.
With options, you don’t have to go ahead with the trade, but you lose the premium you paid.
This is why you need to keep the downside in mind whenever you are thinking of entering a contract.
You must also make use of helpful tools like stop-loss orders to help you sell and exit automatically once a position reaches your pre-determined price to avoid large losses.
You must also note take-profit orders to exit similarly based on a target price to lock in gains. Also, margin requirements will shift in cases where the market is shifting for volatility.
If you cannot produce the extra margin as requested, the broker can close your position for you and take the losses. Therefore, if possible, always keep volatility in mind, and keep some spare funds.
Understand the risk – Leverage means both profits and losses are bigger. You could lose more than you invest.
Start small – Try with small trades or practise with paper trading before risking real money.
Use stop-loss – Always set stop-loss levels to protect your money.
Avoid emotional trading – Stick to your plan. Don’t let greed or fear guide your trades.
Stay updated – News, company results, and global events can change prices quickly.
Know expiry rules – Be clear about contract expiry and settlement.
Check costs and taxes – Brokerage fees and capital gains tax affect your net profits.
These simple habits can make a big difference in your trading journey.
Once you understand the basics, you may want to try some advanced option strategies:
Buy a share and sell a call option on it. This earns you premium income.
Buy a share and also buy a put option. This protects you if the share price falls.
In an uptrend, buy when there is a small dip. In a downtrend, sell when there is a small rise.
Buy one contract and sell another related one at the same time to use price differences.
These strategies are used to balance risk and reward instead of simply guessing market direction.
If you are opening a trading account, you probably have some idea about futures and options. But before you start, keep this in mind. [translate:F&O] should primarily be used for risk management, not just for speculation.
Futures can generate very large profits, but also very large losses. Options are better to deal with since your loss is capped at the premium you pay, but it requires careful thought.
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Future and options are derivative contracts. Their value is based on the value of an underlying asset, which can be a stock or a commodity.
You don’t need a demat account to trade in futures and options. However, you need a brokerage account to trade in these contracts. Stock-based F&O are traded on the NSE and BSE. And, commodity-based F&O are traded on NCDEX and MCX.
The main risk is that the price of the underlying asset may not move in the direction you think. And in the absence of a stop-loss order, your losses can be huge.
First, learn the basics of futures and options. Second, open a brokerage account. Third, start with small amounts.
For option-trading, you can use these strategies: covered call and married put. For trading in futures, you can employ these strategies: pullback strategy and spread trading.
Budget 2024 has increased the taxes on F&O. The budget has increased the tax on futures transactions from 0.0125% to 0.02% of the traded price. Meanwhile, the tax on options transactions has been increased from 0.0625% currently to 0.1% of the option premium.
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