What is Futures and Options? F&O Explained for Indian Investors
Futures and options look, from a distance, like a faster route to the same market: the same NIFTY, the same banks and refiners, with a fraction of the capital down and much larger swings in the account. SEBI’s research explains why that impression needs a health warning before any tutorial — in its most recent three-year study, 93% of individual traders in equity derivatives lost money. This guide explains what these contracts are, how they trade on the NSE, and what the rulebook does to the maths, before any question of strategy.
Research date: Lot sizes, expiry dates, the ban list and segment coverage are taken from exchange files dated 17 August 2026. Margin, settlement and tax rules reflect the regime in force in August 2026. Every worked number below is an illustration, not a live quote or a recommendation.
What is futures and options? The short answer
Futures and options are derivatives: contracts whose value is derived from an underlying share or index rather than from owning it. A futures contract obliges both sides — the buyer must buy and the seller must sell the underlying at the contract price on the expiry date, whatever the market has done in between. An option gives its buyer a right without an obligation: a call is the right to buy at a fixed strike price, a put is the right to sell. The option seller collects a premium for standing on the other side and carries the obligation if the buyer’s right is worth exercising.
Both instruments trade on the exchange in standardised lots, with margins collected upfront and fixed expiry dates. Per the exchange files, the NSE’s F&O segment currently covers 208 stocks and 6 indices. Gale’s futures and options hub collects the live data pages in one place, and if terms like strike, premium or open interest are unfamiliar, the stock market terminology glossary defines them all.
How a futures contract works
Take the NIFTY 50. One NIFTY futures lot is currently 65 units, so with the index at an illustrative 25,000, one lot represents 65 × 25,000 = ₹16,25,000 of index exposure. Nobody pays sixteen lakh upfront; each side deposits a margin — SPAN plus exposure margin, collected upfront by NSE Clearing — which for index futures commonly works out to roughly 12–15% of contract value. Call it ₹2–2.4 lakh to control ₹16.25 lakh of index.
That gap between exposure and deposit is leverage, and it operates through daily mark-to-market. Every evening the exchange settles the day’s price change in cash. A 1% index move is 250 points, or ₹16,250 on one lot — roughly 7–8% of the margin, gained or lost in a single session. A losing position generates margin calls; an unfunded call lets the broker cut the position at whatever price the market offers.
Lot sizes are set by the exchange and change over time. The current index lots:
| Index contract | Lot size (Aug 2026) |
|---|---|
| NIFTY | 65 |
| BANKNIFTY | 30 |
| FINNIFTY | 60 |
| MIDCPNIFTY | 120 |
| NIFTYNXT50 | 25 |
Stock futures work the same way with company-specific lots; the F&O stock list and lot sizes page tracks the live values.
How an options contract works
An option prices the right itself. Suppose — purely as an illustration — a trader buys one lot of a NIFTY call with a 25,000 strike for a premium of ₹150 per unit. The outflow is 150 × 65 = ₹9,750, paid once, with no daily mark-to-market on a bought option. If the index finishes at 25,400 at expiry, the right to buy at 25,000 is worth 400 points: ₹26,000 on the lot, a gain of ₹16,250 before costs. If the index finishes at or below 25,000, the right lapses and the loss is the full ₹9,750 — but never more than that.
The seller of that call collected ₹9,750 for accepting an obligation with no ceiling on its cost. Sellers therefore post margins like futures traders (SPAN plus exposure), and since November 2024 short index options attract an additional 2% Extreme Loss Margin on contract value on their expiry day. Premiums respond to more than direction — time remaining, distance from strike and expected volatility all move the price of the right, which is why an options calculator teaches premium behaviour faster than intuition. Moneyness, Greeks and premium decay get a full treatment in the options trading guide.
Futures and options difference: who carries the obligation
Strip away the jargon and the futures and options difference comes down to who is bound by the contract. Futures bind both sides symmetrically. Options split the contract asymmetrically: the buyer holds a right with a known, capped cost; the seller holds an obligation with an uncapped one.
| Futures | Option buyer | Option seller | |
|---|---|---|---|
| Obligation | Both sides bound | None — a right only | Bound if the option finishes in the money |
| Upfront outlay | SPAN + exposure margin | Premium only | SPAN + exposure margin, plus expiry-day ELM on index shorts |
| Maximum loss | Not capped | Capped at the premium paid | Not capped on a naked position |
| Daily mark-to-market | Yes, settled in cash each evening | No | Margins recalculated daily |
| Payoff shape | Linear with the underlying | Non-linear and time-sensitive | Non-linear and time-sensitive |
Lots, expiry days and settlement
Expiries now run on Tuesdays
Since the expiry-day standardisation of September 2025, NSE index derivatives expire on Tuesdays and BSE contracts on Thursdays; if the day is a trading holiday, expiry moves to the previous trading day. The nearest NIFTY weekly expiry as this is published falls on Tuesday, 18 August 2026 — publication day itself. Stock F&O follows a monthly cycle expiring on the last Tuesday of the expiry month, and the exchange files list Tuesday, 29 September 2026 as the next monthly stock F&O expiry. The expiry calendar tracks the full schedule.
Index F&O settles in cash; stock F&O delivers shares
The settlement split matters more than beginners expect. Index futures and options — NIFTY, BANKNIFTY, FINNIFTY, MIDCPNIFTY and NIFTYNXT50 — are cash-settled. Index options are European-style, exercisable only at expiry, and any in-the-money value is credited in cash at final settlement on T+1. No shares move.
Stock F&O is different. Since October 2019, under SEBI’s April 2018 mandate, all stock futures and all in-the-money stock options are compulsorily physically settled at expiry. In-the-money stock options are auto-exercised; out-of-the-money options lapse with no delivery obligation. The resulting obligations:
| Position held to expiry | Delivery obligation |
|---|---|
| Long ITM call | Take delivery of shares at the strike |
| Short ITM call | Give delivery of shares |
| Long ITM put | Give delivery of shares |
| Short ITM put | Take delivery of shares at the strike |
Offsetting positions in the same underlying are netted into a single obligation, and shares move through the demat system at the strike or settlement price. To ensure delivery can be honoured, physical-delivery margins phase in over the last week of the cycle and reach roughly 100% of contract value by expiry day. A position that needed ₹1.5 lakh of margin all month can demand funding close to the full contract value in its final days.
The tax detail at expiry
Securities Transaction Tax adds its own asymmetry. At the rates effective 1 April 2026, selling an option costs 0.15% of the premium (paid by the seller) and selling a futures contract costs 0.05% of turnover. An in-the-money option carried into expiry is exercised instead, and the buyer then pays STT at 0.15% of the full intrinsic value — settlement price minus strike — a far larger base than the premium the option was originally bought for. On the illustrative call above, that is 0.15% of ₹26,000 of intrinsic value rather than of a traded premium. For stock options, exercise also brings the physical delivery obligation.
Margins, and the ban period that stops new trades
The margin system is layered. SPAN margin covers portfolio risk, exposure margin sits on top, and both are collected upfront by NSE Clearing. Recent rules tighten expiry day specifically: the 2% ELM on short index options, and, under the same 2024 set of SEBI measures, calendar spreads losing their cross-expiry margin offset on the day one leg expires. From May 2026, NSE has also notified an additional 15% exposure margin on stock contracts where the top ten clients hold more than a fifth of the market-wide limit.
Individual stocks (not indices) carry that Market Wide Position Limit, or MWPL. Since October 2025 it is set quarterly as the lower of 15% of free float or 65 times the stock’s average daily delivery value, with a floor of 10% of free float — and open interest is measured on a delta-adjusted, futures-equivalent basis with at least four random intraday checks rather than only at day-end. When open interest crosses 95% of MWPL, the stock enters the ban period: only position-reducing trades are allowed, switching a long into a short (or the reverse) is prohibited, and the ban lifts only when open interest falls below 80%. On this article’s publication date, four securities sat in the ban: BANDHANBNK, LICI, MANAPPURAM and SAIL. The live F&O ban list is updated daily.
What future and options trading is used for
Speculation is where most people start, but it is the last of the legitimate uses, not the first.
- Hedging. An investor holding a portfolio of large-cap shares can buy index puts so that a sharp market fall is partly offset by a gain on the puts. The premium is the cost of that insurance, paid whether or not the fall arrives.
- Locking a price. Futures let a participant fix today the price of a transaction that settles later — the original commodity-market logic, applied to financial assets.
- Income overlays. Some investors sell options against existing holdings, collecting premiums in exchange for capping upside or accepting an obligation to buy. The income is real; so is the obligation.
- Directional trading. Expressing a leveraged view on price. This is where SEBI’s loss data lives, and where transaction costs compound fastest.
These are descriptions of use, not suggestions. Research on the underlying itself — the technical analysis guide covers one half of that work — comes before any derivative on it.
The SEBI numbers, stated plainly
SEBI’s September 2024 study of individual traders in equity F&O found that 93% lost money across FY2022 to FY2024, with aggregate net losses of about ₹1.81 lakh crore over the three years and an average loss of around ₹2 lakh per trader including transaction costs. Losses were most concentrated among the most active traders. The regulator’s earlier January 2023 study had already found 89% of individual equity F&O traders losing money in FY2022. These are measured outcomes across crores of accounts, not cautionary boilerplate. Anyone meeting market risk for the first time has a more useful starting point in how to start investing in the share market than in a derivatives account.
FAQ
What is the meaning of futures and options in simple words?
They are exchange-traded contracts that derive value from a share or index. A future obliges both parties to transact at a set price on a set date. An option gives its buyer the right — without the obligation — to buy (a call) or sell (a put) at a fixed strike price, in exchange for a premium paid to the seller.
What is the main difference between futures and options?
Obligation and loss shape. Futures bind both sides, and losses on either side are not capped. An option buyer risks only the premium; an option seller collects the premium but carries an uncapped obligation. Margin treatment follows the risk: futures traders and option sellers post margins, option buyers pay the premium.
How much money does future and options trading require?
More than the quoted premium suggests. Index futures margins commonly run 12–15% of contract value — around ₹2–2.4 lakh on one NIFTY lot at an illustrative 25,000 — and stock positions carried toward expiry attract delivery margins approaching full contract value. Brokers may ask for more than the exchange minimum.
How are futures and options settled in India?
Index F&O is cash-settled, with in-the-money option value credited on T+1 after expiry — Tuesdays on the NSE under the current calendar. Stock futures and in-the-money stock options are physically settled: shares change hands through the demat system at expiry.
Do most retail traders make money in F&O?
No. SEBI’s September 2024 study found 93% of individual equity F&O traders lost money over FY2022–FY2024. A correct directional view can still lose money after premium decay, transaction costs and taxes.
Sources
- NSE: equity derivatives contract specifications
- NSE Clearing: equity derivatives margin framework
- NSE Clearing: position limits and the ban period after the October 2025 changes (PDF)
- Zerodha Varsity: physical settlement of stock F&O
- Zerodha: SEBI’s index derivatives measures
- Zerodha support: how STT is calculated
- SEBI: studies of profit and loss of individual traders in the equity F&O segment (January 2023 and September 2024)
Exchange files, linked pages and the sources above were checked on 17 August 2026. Margin rates, lot sizes, tax rates, expiry calendars and ban lists change; confirm current exchange and SEBI material before relying on any figure.
What to weigh before the first F&O trade
The contracts themselves are neutral machinery — the same put that ruins an over-leveraged account hedges a careful one, and the difference is usually decided before the order is placed. Worth weighing honestly: which side of the obligation a position sits on, and whether the maximum loss is the premium or something without a ceiling; the full capital demand across the life of the trade, including delivery margins in expiry week; the cost stack of premium decay, STT bases, brokerage and slippage that any view must overcome; and the base rate — 93% of individual traders lost money over three measured years, most of whom believed their case was different. The evidence that would soften that caution is personal: a written plan, position sizes that survive the worst mark-to-market day, and costs computed before the trade rather than discovered after it.
Gale.in is not a SEBI-registered investment adviser or research analyst; this article is education and description, not a recommendation to trade any contract.