Futures and Options Basics: What Beginners Must Know Before Starting
Published 2026-10-16 · Aadarna Stock Broking Pvt. Ltd.
Key takeaways
- Futures and options are derivatives: contracts whose value depends on an underlying share, index or commodity.
- A futures contract obliges both sides to complete it; an option gives the buyer a right and the seller an obligation.
- Trades happen in fixed lot sizes with margin, so gains and losses can be large compared with the money you put in.
- SEBI studies have found that most individual traders in equity F&O incur net losses.
Futures and options, often called F&O, attract many new traders because they seem to offer big moves with little money. Before you consider them, it is important to understand how they work and how risky they are for individuals. This guide explains the basics. It is education, not encouragement to trade.
What is a derivative?
A derivative is a contract whose value comes from something else, called the underlying. In India's equity markets, the underlying is usually a share or an index; in commodity markets it may be gold, crude oil or an agricultural product.
Derivatives were created mainly to manage risk. For example, a business can use them to protect against a price change. Many individuals, however, use them to speculate, which is where most losses happen.
Futures
A futures contract is an agreement to buy or sell the underlying at a fixed price on a future date, called expiry. Both the buyer and seller are obliged to complete it.
You do not pay the full contract value upfront. Instead you deposit margin, a portion of the value. Every day, gains and losses are settled in your account based on the closing price. If losses reduce your margin below the required level, you must add money or the position can be closed. Losses can exceed the margin you first deposited.
Options
An option gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) the underlying at a set price, called the strike price, on or before expiry. The buyer pays a premium to the seller for this right.
The buyer's maximum loss is the premium paid, but many options expire worthless, so losing the whole premium is common. The seller receives the premium but takes on the obligation, and the seller's potential loss can be very large. That is why option sellers must deposit substantial margin.
An option's price is affected by the underlying's price, the time left to expiry and how volatile the market is. As expiry approaches, the time component of the premium shrinks, which works against buyers.
Lot size and expiry
- F&O contracts trade in fixed lot sizes set by the exchange. You cannot buy just one share's worth.
- Each contract has an expiry date, after which it is settled and ceases to exist.
- Because of lot sizes, the value you control is usually far larger than the margin or premium you pay. That is the leverage that magnifies both gains and losses.
Costs
F&O trades carry brokerage, exchange charges, Securities Transaction Tax, stamp duty, SEBI fees and GST. Because traders often make many trades, these costs add up quickly. SEBI's study found that loss makers spent a substantial amount on transaction costs on top of their trading losses. Read our article on F&O charges and check your contract notes to see your real costs.
Before you even consider F&O
- Read the risk disclosure document your broker provides when you activate the segment.
- Understand margin, lot size, expiry and how losses are settled daily.
- Use only money you can afford to lose entirely.
- Never trade on tips from unregistered persons or social media groups.
- Keep a record of every trade and its costs, and review honestly whether it is working for you.
Brokers ask for income proof before activating F&O, and the activation screen shows SEBI's risk disclosures. Take them seriously.
Frequently asked questions
Can I lose more than I invest in F&O?
In futures and when selling options, yes: losses can exceed the margin you deposited, and you must pay the difference. When buying options, your loss is limited to the premium, but losing all of it is common.
Why do I need income proof to trade F&O?
Brokers must check that derivatives trading is suitable for you given its high risk. Income proof is part of that check.
Is F&O a quick way to grow small savings?
No. SEBI's studies show that most individual F&O traders incur net losses. It is not a reliable way to grow savings, and it carries a real risk of losing them.
Sources
- SEBI – research studies, including the January 2023 study of individual traders' profit and loss in equity F&O
- NSE – exchange website
- BSE – exchange website
Risk disclosures on derivatives
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to ₹50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
Source: SEBI study dated January 25, 2023 on "Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment", wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.