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.
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.
