Comprehensive guide to options and futures trading in India. Learn strategies, risk management, and how to trade derivatives profitably in NSE F&O segment.
Understanding Derivatives
Derivatives are financial contracts whose value is derived from an underlying asset (stocks, indices, commodities). In India, NSE offers Futures and Options on stocks, Nifty, Bank Nifty, and other indices.
Futures Trading
What are Futures?
A futures contract is an agreement to buy/sell an asset at a predetermined price on a future date (expiry). Both buyer and seller are obligated to fulfill the contract.
Key Features:
- Lot Size: Fixed quantity (e.g., Nifty = 50, Bank Nifty = 15)
- Expiry: Last Thursday of every month
- Margin: 15-40% of contract value (leverage 2.5-6x)
- Mark to Market: Daily profit/loss settlement
- No Premium: Pay only margin money
Futures Trading Strategies
1. Long Futures (Bullish)
- Buy futures when expecting price rise
- Profit = (Exit Price - Entry Price) × Lot Size
- Best when: Strong uptrend, positive news flow
2. Short Futures (Bearish)
- Sell futures when expecting price fall
- Profit = (Entry Price - Exit Price) × Lot Size
- Best when: Downtrend, negative fundamentals
3. Calendar Spread
- Buy near month, sell far month (or vice versa)
- Profit from price difference between months
- Lower risk strategy for experienced traders
Options Trading
What are Options?
Options give the RIGHT (not obligation) to buy/sell an asset at a specific price (strike price) before expiry.
Types of Options
Call Option (CE)
- Buyer: Right to buy, pays premium, limited loss (premium), unlimited profit
- Seller: Obligation to sell, receives premium, limited profit (premium), unlimited loss
- Buy when: Bullish on market
Put Option (PE)
- Buyer: Right to sell, pays premium, limited loss (premium), high profit potential
- Seller: Obligation to buy, receives premium, limited profit (premium), high loss potential
- Buy when: Bearish on market
Important Option Terms
- Strike Price: Price at which option can be exercised
- Premium: Cost of buying option
- In The Money (ITM): Strike < Spot (Call), Strike > Spot (Put)
- At The Money (ATM): Strike ≈ Spot price
- Out of The Money (OTM): Strike > Spot (Call), Strike < Spot (Put)
- Intrinsic Value: Spot - Strike (Call) or Strike - Spot (Put)
- Time Value: Premium - Intrinsic Value
The Greeks
Delta (Δ)
- Measures option price change per ₹1 change in underlying
- Call: 0 to 1, Put: 0 to -1
- ATM options have delta ~0.5
Theta (Θ)
- Time decay - how much premium erodes daily
- Accelerates in last week before expiry
- Option sellers benefit from theta decay
Vega (V)
- Sensitivity to volatility changes
- Higher volatility = higher premiums
- ATM options have highest vega
Gamma (Γ)
- Rate of change of delta
- Highest for ATM options near expiry
- Important for dynamic hedging
Popular Options Strategies
1. Long Call (Bullish)
- When: Expect significant upside
- Risk: Limited to premium paid
- Profit: Unlimited (theoretically)
- Example: Buy Nifty 22000 CE when Nifty at 21800
2. Long Put (Bearish)
- When: Expect significant downside
- Risk: Limited to premium paid
- Profit: Substantial if sharp fall
- Example: Buy Nifty 21500 PE when Nifty at 21800
3. Bull Call Spread
- Strategy: Buy ATM Call + Sell OTM Call
- Risk: Limited (net premium paid)
- Profit: Limited (difference in strikes - net premium)
- Best for: Moderate bullish view, reduce cost
4. Bear Put Spread
- Strategy: Buy ATM Put + Sell OTM Put
- Risk: Limited (net premium paid)
- Profit: Limited (difference in strikes - net premium)
- Best for: Moderate bearish view
5. Straddle (High Volatility Play)
- Strategy: Buy ATM Call + Buy ATM Put (same strike, same expiry)
- When: Expect big move but unsure of direction
- Risk: Total premium paid (both options)
- Profit: Unlimited on either side
- Best for: Events like budget, RBI policy, election results
6. Strangle (Similar to Straddle, Lower Cost)
- Strategy: Buy OTM Call + Buy OTM Put
- When: Expect big move, lower premium than straddle
- Break-even: Needs bigger move than straddle
7. Iron Condor (Range-Bound Strategy)
- Strategy: Sell OTM Call + Buy further OTM Call + Sell OTM Put + Buy further OTM Put
- When: Expect range-bound market
- Risk: Limited (width of spread - net credit)
- Profit: Limited (net credit received)
- Best for: Low volatility, sideways market
F&O Risk Management
Position Sizing
- Never use more than 25% of capital for F&O
- Max risk per trade: 2-3% of F&O capital
- Maintain adequate margin buffer (1.5-2x requirement)
Stop Loss Rules
- Futures: 1-2% of position value
- Option Buying: 30-50% of premium paid
- Option Selling: 2x premium received or when position doubles
Avoid These Mistakes
- Buying deep OTM options hoping for lottery gains
- Selling naked options without hedge (unlimited risk)
- Holding positions till expiry (theta decay maximum)
- Trading without understanding Greeks
- Over-leveraging with full margin
- Ignoring transaction costs (high in F&O)
Tax Implications
- F&O Gains: Treated as business income
- Tax Rate: As per your income slab (up to 30% + cess)
- Set-off: F&O losses can offset business income
- Audit: Required if turnover >₹10 crore or profit >10% of turnover
Best Practices
- Start with index options (Nifty/Bank Nifty) - higher liquidity
- Avoid stock options initially - lower liquidity, wider spreads
- Trade during first hour (9:15-10:15 AM) for best liquidity
- Close positions by 3:15 PM on expiry day
- Use options simulator/paper trading before live trading
- Understand options payoff graphs thoroughly
- Track open interest and put-call ratio for market sentiment
Beginner's Roadmap
- Month 1-2: Learn theory, watch markets, paper trade
- Month 3-4: Start with option buying (long call/put) - limited risk
- Month 5-6: Try spreads (bull call, bear put)
- Month 7+: Advanced strategies (straddles, iron condors) only after consistent profits
Critical Warning: F&O trading is extremely risky. 95% of retail F&O traders lose money. Never trade with borrowed money or funds needed for essential expenses. Start small and scale gradually.