Confused about terms like “futures,” “options,” or “derivatives”? You’re not alone! Futures and options trading is a popular way to trade in the Indian stock market, but it can feel overwhelming for newcomers. Let’s break it down in simple terms, with relatable examples and clear explanations.
What Are Futures and Options?
Futures: Like a Fixed-Price Deal
Imagine you agree to buy 10 kg of rice from a farmer next month at ₹50/kg, no matter what the market price is then. That’s a future contract!
- In the stock market: You promise to buy/sell shares (or indices like Nifty 50) at a fixed price on a future date.
- Example: You buy a Tata Motors futures contract at ₹600/share expiring on 25th November 2023. If the price rises to ₹650, you profit. If it drops to ₹550, you still have to buy at ₹600 (so you lose).
Options: The “Choice” Contract
Options give you the right, but not the obligation, to buy or sell. Think of it like paying a small fee to reserve a product at a store. You can choose to buy it later, but you’re not forced to.
- Call Option (Buy): Pay ₹10 to “reserve” a Reliance share at ₹2,500 for the next month. If the price jumps to ₹2,800, you buy it cheap. If it falls, you let the option expire and lose only ₹10.
- Put Option (Sell): Pay ₹15 to “reserve” selling an Infosys share at ₹1,400. If the price crashes to ₹1,200, you sell high. If it rises, you ignore the option.
Futures vs. Options: Key Differences
| Aspect | Futures | Options |
|---|---|---|
| Obligation | Must buy/sell on expiry. | Choice to buy/sell (no obligation). |
| Risk | High risk (unlimited losses). | Limited risk (lose only the premium paid). |
| Cost | Requires a margin (deposit). | Buyer pays a premium (like a fee). |
| Profit Potential | Unlimited profit. | Unlimited for calls, limited for puts. |
Key Terms Simplified
- Expiry Date: The contract’s “use-by” date (e.g., every month’s last Thursday).
- Lot Size: Fixed number of shares per contract (e.g., 1 lot of Nifty = 50 units).
- Strike Price: The fixed price you agreed on (e.g., ₹2,500 for Reliance).
- Margin: A security deposit to trade futures (e.g., 15% of the contract value).
- Premium: The fee paid to buy an option (e.g., ₹20 for a Tata Steel call).
How to Start Future & Option Trading
Step 1: Open a Demat & Trading Account
Choose a broker like Zerodha, Upstox, or Angel One. Submit PAN, Aadhaar, and bank details.
Step 2: Learn the Basics
- Futures: Focus on predicting price direction (up/down).
- Options: Use calls for bullish bets, puts for bearish bets.
Step 3: Start Small
- Example: Buy 1 lot of Bank Nifty call option (lot size = 15 units) with a ₹200 premium.
- Total cost = 15 x ₹200 = ₹3,000 (max loss if the trade fails).
Simple Strategies for Beginners
Strategy 1: Hedging (Protecting Your Stocks)
- Scenario: You own 100 HDFC Bank shares worth ₹1,500 each. Worried about a market crash?
- Action: Buy a put option at ₹1,450 (cost: ₹5,000 premium).
- Result: If HDFC drops to ₹1,300, your put option lets you sell at ₹1,450, limiting losses.
Strategy 2: Speculating with Calls
- Scenario: Expecting TCS to rise after good earnings?
- Action: Buy a TCS call option (strike price ₹3,500, premium ₹50).
- Result: If TCS hits ₹3,600, profit = (₹100 gain per share – ₹50 premium) x lot size.
Risks You MUST Know
- Leverage Danger: Futures require small margins but can lead to huge losses.
- Example: A ₹1 lakh margin lets you control ₹7 lakh in stocks. A 10% drop = ₹70,000 loss!
- Time Decay (Options): Options lose value as expiry nears. Even if the stock moves your way, you might not profit if time runs out.
- Complexity: Unlike stocks, F&O involves understanding “Greeks” (Delta, Theta) and market trends.
SEBI Warning: Over 90% of retail traders lose money in F&O. Start with paper trading!
Taxes in India
- F&O Profits are treated as business income (taxed as per your income slab).
- Losses can be carried forward for 8 years.
- STT (Securities Transaction Tax):
- 0.017% on options (when you sell).
- 0.025% on futures (when you sell).
Example: You earn ₹50,000 from F&O trading. If you’re in the 30% tax bracket, you pay ₹15,000 as tax.
SEBI Rules for Safety (2023)
- 100% Margin Required: You need to deposit the full margin upfront (no more partial payments).
- Weekly Expiry: Bank Nifty and Nifty Financial Services now expire every week (more frequent opportunities).
- Risk Disclosures: Brokers must warn clients about potential losses.
Tips for New Traders
- Practice First: Use free platforms like Zerodha Varsity or Sensibull for virtual trading.
- Avoid Penny Stocks: Stick to liquid indices like Nifty or Bank Nifty to avoid getting stuck.
- Follow News: RBI policies, global markets, and corporate results impact prices.
Final Thoughts
F&O trading isn’t a “get-rich-quick” scheme. It requires patience, learning, and strict risk management. Start with small amounts, focus on 1-2 strategies, and gradually build confidence. Remember, even experts lose sometimes—what matters is limiting losses and staying disciplined.
Next Steps:
- Open a demo account.
- Watch YouTube tutorials by Indian traders.
- Read SEBI’s investor guides.
Helpful Links: