What Are Futures and Options (F&O)? Meaning, Types and Examples
Futures and options (F&O) are derivative contracts: their value comes from an underlying asset such as a stock, an index like NIFTY 50, a commodity or a currency. A future is an obligation to buy or sell the underlying at a fixed price on a set date. An option gives the buyer the right, but not the obligation, to buy (call) or sell (put) at a fixed price, in exchange for a premium.
What are derivatives?
A derivative is a contract whose price is derived from something else. You don't buy the asset itself; you buy or sell a contract linked to its price. Futures and options are the two main types traded on Indian exchanges, and together they're called F&O.
Traders and investors use them for three things:
- Hedging: protecting a portfolio or a business against a price move.
- Speculation: taking a view on direction or volatility with less capital than buying the asset.
- Arbitrage: profiting from small price gaps between the cash and derivatives markets.
What is a futures contract?
A futures contract is an agreement to buy or sell an underlying asset at a price fixed today, for settlement on a set future date (the expiry). Both sides are bound: the buyer must buy and the seller must sell.
On the exchange, a trader who buys one lot of NIFTY futures at 25,000 gains ₹65 for every point NIFTY rises (one lot is 65 units) and loses ₹65 for every point it falls. A 200-point move is a ₹13,000 profit or loss on one lot.
Key features of futures:
- Margin, not full value. You deposit a margin (a fraction of the contract value) with your broker, not the full amount. That makes futures leveraged.
- Mark-to-market. Profits and losses are settled into your account every day. If losses eat into your margin, you have to add money.
- Expiry. Index and stock futures on NSE are monthly contracts. You can close before expiry or roll to the next month.
What is an options contract?
An option gives the buyer the right, but not the obligation, to buy or sell the underlying at a fixed price (the strike) on or before expiry. The buyer pays a premium to the seller for that right.
- A call option (CE) is the right to buy. You buy a call if you expect the price to rise.
- A put option (PE) is the right to sell. You buy a put if you expect the price to fall, or to protect shares you own.
On NIFTY: if you buy the 25,000 call at ₹250, one lot costs ₹250 × 65 = ₹16,250. That is the most you can lose. If NIFTY expires at 25,500, the call is worth ₹500, and your profit is (500 − 250) × 65 = ₹16,250. Below 25,000, the call expires worthless.
Futures vs options: the key differences
Same bullish view: the future moves point for point; the call caps the loss at the premium
| Futures | Options (buyer) | Options (seller) | |
|---|---|---|---|
| Right or obligation | Obligation | Right | Obligation |
| Upfront cost | Margin | Premium | Margin (premium received) |
| Maximum loss | Large, open-ended | Premium paid | Large; unlimited for a naked call |
| Maximum profit | Open-ended | Open-ended (call), large (put) | Premium received |
| Time decay | No direct effect | Works against you | Works for you |
| Sensitivity to volatility | Low | Gains when IV rises | Loses when IV rises |
Types of futures and options in India
| Type | Underlying | Where it trades | Typical users |
|---|---|---|---|
| Index F&O | NIFTY 50, BANK NIFTY, FINNIFTY, MIDCPNIFTY, SENSEX and others | NSE, BSE | Traders, portfolio hedgers |
| Stock F&O | Selected large, liquid stocks | NSE, BSE | Traders, investors hedging holdings |
| Commodity F&O | Gold, silver, crude oil, natural gas, metals, agri goods | MCX, NCDEX | Businesses hedging prices, traders |
| Currency F&O | USD/INR, EUR/INR, GBP/INR, JPY/INR | NSE, BSE | Importers, exporters, traders |
| Interest rate futures | Government bonds | NSE, BSE | Banks, institutions |
Index and stock derivatives are where most retail F&O activity happens. Only stocks that meet the exchanges' eligibility criteria have F&O contracts.
What are "future options" or options on futures?
When the underlying of an option is itself a futures contract, it's called an option on futures (or futures option). The option buyer gets the right to take a position in the futures contract at the strike price. These are common in commodity markets. For most retail traders in Indian equities, though, "F&O" simply means futures and options on stocks and indices, two separate kinds of contract.
How F&O contracts work in India
Lot size
F&O trades in fixed lots. From the January 2026 series, NIFTY's lot size is 65 and BANK NIFTY's is 30. Stock lot sizes vary by stock and are revised periodically, so check the exchange's current list.
Expiry
- Tuesday NSE expiry day for weekly and monthly contracts
- 1 weekly index expiry per exchange: NIFTY on NSE, SENSEX on BSE
- Monthly BANK NIFTY, FINNIFTY and MIDCPNIFTY expiries
Settlement
Index F&O is cash-settled: at expiry, only the difference is paid. Stock F&O on NSE is physically settled: an open stock future or in-the-money stock option at expiry leads to delivery of the shares, so close or roll positions you don't want delivered.
Margin
Futures buyers and sellers, and option sellers, must keep margin with their broker, calculated by the exchange's risk system (SPAN plus exposure margin). Option buyers pay only the premium. Margin requirements change with volatility, so check them before every trade.
Benefits and risks of F&O
Benefits
- Hedge a portfolio or a business against adverse price moves
- Take a position with less capital than buying the asset
- Profit from rising, falling or sideways markets with the right structure
- Option buyers know their maximum loss in advance
- Deep, liquid markets in NIFTY and other major contracts
Risks
- Leverage magnifies losses as well as gains
- Futures and short options can lose more than the margin deposited
- Option buyers face time decay every day
- Expiry-day moves can be sharp and fast
- SEBI's studies show most individual F&O traders lose money
How to start trading futures and options in India
- Open a demat and trading account with a SEBI-registered broker and activate the F&O segment (brokers ask for income proof and a risk disclosure).
- Learn the basics: lot sizes, margin, expiry and how to read an option chain. Our options trading in India guide covers each one.
- Start with defined risk: buying an option, or a hedged spread, rather than naked futures or option selling.
- Write the plan first: entry, stop-loss, target and position size.
- Test before trading: backtest the rules on historical data and run them in a simulated mode.
Frequently asked questions
What is F&O in the share market?
F&O stands for futures and options, the two main types of derivative contracts traded on Indian exchanges. Their value comes from an underlying asset such as a stock, an index, a commodity or a currency.
What is the difference between futures and options?
A future obliges both the buyer and seller to trade the underlying at the agreed price at expiry. An option gives the buyer a right, not an obligation, and costs a premium. A futures position can lose without limit; an option buyer can lose only the premium.
Which is riskier, futures or options?
Buying options has the smallest maximum loss (the premium), but loses value with time. Futures and option selling carry larger, open-ended risk because losses move with the underlying. The risk depends on which side of the contract you take.
What are the types of futures and options?
In India: index F&O (such as NIFTY 50 and SENSEX), stock F&O, commodity F&O on MCX and NCDEX, currency F&O (such as USD/INR) and interest rate futures.
How much money do I need to trade F&O?
To buy an option you need the premium × lot size. Futures and option selling need margin, which is usually a fraction of the contract value but can still be over a lakh rupees per lot for index contracts. Check your broker's margin calculator.
Are F&O contracts cash-settled or physically settled in India?
Index futures and options are cash-settled. Stock futures and options on NSE are physically settled, so positions open at expiry can lead to delivery of shares.
Can F&O trading be automated?
Yes. Platforms such as Tradetron let you build futures and options strategies as rules, backtest them and run them automatically through your broker.
