What are Derivatives?
Derivatives are financial contracts whose value is derived from an underlying asset — typically a stock index (Nifty 50, Bank Nifty), individual stocks (around 200 stocks in F&O on NSE), commodities, or currencies. In India, NSE is the world's largest derivatives exchange by contract volume.
There are two main types of equity derivatives: Futures and Options.
What is a Futures Contract?
A futures contract is an agreement to buy or sell an asset at a predetermined price on a specific future date. Both parties are obligated — the buyer must buy, the seller must sell.
Example: Nifty 50 futures lot size = 75 units. If Nifty is at 24,000 and you buy 1 Nifty Futures lot, your contract value = 24,000 × 75 = ₹18 lakh. You pay margin (typically 10–15%), not the full value — roughly ₹1.8–2.7 lakh. If Nifty rises to 24,500, profit = 500 × 75 = ₹37,500. If it falls to 23,500, loss = 500 × 75 = ₹37,500.
Key features of futures:
- Obligatory contract (unlike options)
- Daily mark-to-market (profits/losses settled daily to margin account)
- Expiry on last Thursday of every month (weekly expiry for Nifty Bank Nifty)
- High leverage — small margin controls large contract value
What are Options?
An option gives the buyer the right but not the obligation to buy or sell the underlying at a specific price (strike price) before or on the expiry date. The buyer pays a premium for this right. The seller (writer) receives the premium and takes on the obligation.
- Call Option: Right to buy. You buy a call if you expect the underlying to rise.
- Put Option: Right to sell. You buy a put if you expect the underlying to fall.
Example: Nifty is at 24,000. You buy a Nifty 24,200 Call at ₹80 premium (lot = 75). Cost = ₹80 × 75 = ₹6,000. If Nifty rises to 24,500 at expiry, intrinsic value = 24,500 − 24,200 = ₹300. Profit = (₹300 − ₹80) × 75 = ₹16,500. If Nifty stays below 24,200, the call expires worthless and you lose ₹6,000.
F&O Lot Sizes and Expiry
SEBI sets minimum lot sizes to prevent excessive leverage. Nifty 50 lot = 75. Bank Nifty lot = 30. Individual stocks have varying lot sizes. Expiry: Monthly (last Thursday), Weekly (Nifty and Bank Nifty have weekly options on every Thursday). After the 2023 regulatory changes, weekly options for individual stocks were discontinued.
Is F&O Suitable for You?
SEBI data shows that over 89% of individual F&O traders lose money. The average loss per losing trader is ₹1.1 lakh per year. F&O is a zero-sum game — your gain is another participant's loss. Market makers and institutions have significant informational and structural advantages.
F&O is suitable for experienced investors who need to hedge existing positions — for example, buying Nifty puts to protect a large equity portfolio against a market crash. It is not suitable for beginners as a wealth-building tool.
F&O Taxation in India
F&O trading is treated as business income in India, regardless of whether you hold shares for delivery. Profits are taxed at your applicable income tax slab rate. Losses can be carried forward for up to 8 years and set off against future business income. Tax audit is mandatory if F&O turnover exceeds ₹10 crore (or ₹2 crore if loss is claimed).