What are derivatives?
Futures and options are contracts whose value derives from an underlying - an index like NIFTY or a stock like Reliance. They exist for two purposes: hedging (insuring a portfolio) and speculation (betting on direction with leverage).
Futures in 60 seconds
A futures contract locks a price today for settlement on the expiry date.
- Buy 1 lot of NIFTY futures at 24,000 → if NIFTY rises to 24,300, you gain 300 × lot size; if it falls, you lose the same way.
- You post a margin (SPAN + exposure, usually 10-15% of contract value) - this is the leverage, and it cuts both ways.
- Contracts expire monthly; positions are marked-to-market daily.
Options in 60 seconds
An option is the right, not obligation, to buy (a Call/CE) or sell (a Put/PE) at a strike price before expiry. The buyer pays a premium for that right.
| You are | Max loss | Max gain |
|---|---|---|
| Option buyer | Premium paid | Large |
| Option seller | Potentially unlimited | Premium received |
Example: NIFTY at 24,000. You buy a 24,200 CE for ₹120 premium (lot 75 = ₹9,000). If NIFTY closes at 24,500, the option is worth ~₹300 → ₹22,500, a ₹13,500 profit. If NIFTY stays below 24,200, you lose the ₹9,000 - your entire premium.
The vocabulary you'll meet daily
- Lot size - fixed quantity per contract (NIFTY 75).
- Strike price - the level the option references.
- Expiry - index options have one weekly expiry per exchange plus monthly; stock F&O is monthly.
- OI (open interest) - outstanding contracts; shifts in OI reveal where positions build (see our live F&O dashboard).
- PCR - put-call ratio, a sentiment gauge.
- Settlement price - the number your contract is finally valued at on expiry. Since 3 August 2026 this comes out of the closing auction, explained in the next section.
How your contract gets settled: what CAS changed
On expiry day, the profit or loss on an F&O position is not decided by the last tick you saw. It is decided by a settlement price computed after the market closes. SEBI changed how that number is built, in the same circular that introduced the Closing Auction Session (CAS) in the cash market - HO/47/11/11(3)2025-MRD-POD2/I/2765/2026 dated 16 January 2026, effective for CAS from 3 August 2026.
Because the closing price of the underlying stock is now discovered by an auction rather than a 30-minute average, the settlement rules had to follow (para 4.9.1):
| Contract type | Settled at |
|---|---|
| Index futures and options | The closing price of the underlying index on expiry day - and that index close is itself derived from the closing prices of the index constituents |
| Stock futures and options | A price calculated by the clearing corporations as the volume-weighted average of the stock's closing prices in the cash segment across all stock exchanges |
Two consequences worth holding on to:
- For index contracts, your settlement is a function of how every constituent's closing auction resolves. There is no separate auction for the index itself - the index close is built up from its components.
- For stock contracts, the settlement price is a cross-exchange number. The close on one exchange is not the settlement price; the volume-weighted average across all of them is.
Two timing changes that affect derivative traders
The derivatives segment stays open until 3:40 p.m. (para 4.2.3). The cash-market closing auction runs 3:15 p.m. to 3:35 p.m., but equity derivatives continue trading past it. So there is a window at the end of the day where the cash market is in auction or already closed and your derivative position is still live and tradeable.
Stock futures price bands are aligned to the auction band from 3:15 p.m. to 3:40 p.m. (para 4.4.2). In that window the price band on stock futures is brought in line with the band applicable during CAS, and the usual dynamic flexing of stock futures price bands does not operate. It resumes in its normal form during continuous trading. In plain terms: the elastic that normally lets a futures band widen intraday is switched off for the last 25 minutes.
If you carry positions into the close - and especially if you trade on expiry day - read the full mechanics in our Closing Auction Session guide, including why a stop loss order does not follow you into the auction.
The risk paragraph you should actually read
A SEBI study found 9 out of 10 individual traders in equity F&O incurred net losses, averaging over a lakh per year. Leverage amplifies mistakes faster than skill develops. Sensible rules: risk a small fixed % per trade, prefer defined-risk positions (option buying/spreads) while learning, and never sell naked options with money you can't lose.
F&O and tax
F&O income is non-speculative business income - see our tax guide for how that changes your ITR.
Check exact margins before trading with our F&O margin calculator, and get research-backed guidance from the Parasram desk - custom brokerage for active F&O traders.
