Futures and options — usually shortened to F&O — are among the most heavily traded products on Indian exchanges. They are also among the most misunderstood. Advertisements and social media often show quick profits; they rarely show the far more common outcome. Before you trade, it helps to understand clearly what futures and options risks look like, and what the regulator's own research has found.
What are futures and options?
Both are derivatives — contracts whose value comes from something else, such as a share, an index like the Nifty 50, a currency or a commodity.
- A futures contract is an agreement to buy or sell the underlying at a fixed price on a future date. Both sides are obliged to settle. Every rupee move in the underlying is a rupee of profit or loss for you, multiplied by the contract size.
- An options contract gives the buyer the right, but not the obligation, to buy (a call) or sell (a put) at a set price before or on expiry. The buyer pays a premium. The seller (writer) receives the premium and takes on the obligation.
Contracts expire on fixed dates — monthly for stock derivatives, and weekly or monthly for some index contracts.
Lot sizes and contract value
You can't buy one share's worth of a futures contract. F&O trade in lots fixed by the exchange, and each lot represents a sizeable amount of the underlying.
In late 2024, SEBI raised the minimum contract value for index derivatives, partly to discourage small investors from taking positions they may not be able to afford. Lot sizes are also revised periodically as prices change, so always check the current lot size before you place an order.
How margin works — and why it creates leverage
To take a futures position, you don't pay the full contract value. You deposit a margin — a fraction of the value — set by the exchange based on the volatility of the underlying.
A worked example (illustrative numbers)
Suppose a stock trades at ₹1,000 and the futures lot is 500 shares.
| Item | Amount |
|---|---|
| Contract value (500 × ₹1,000) | ₹5,00,000 |
| Margin required (say 20%) | ₹1,00,000 |
| Stock falls 5% to ₹950 | Loss of ₹25,000 |
| Loss as a share of your margin | 25% |
A 5% move — an ordinary week for many stocks — wiped out a quarter of the money you put in. A 20% fall would wipe out all of it, and losses can go beyond your margin if the market moves sharply.
Losses are settled daily (mark-to-market), so you may need to add money every day the position goes against you.
Options: different shape, similar trap
- Option buyers can lose at most the premium paid. But a large number of options expire worthless, and premiums lose value as expiry approaches (time decay). Buying cheap out-of-the-money options repeatedly can drain capital steadily.
- Option sellers collect a small premium but face potentially large or unlimited losses if the market moves sharply against them. Selling also requires substantial margin.
In F&O, the question isn't only "how much can I make?" It is "how much can I lose, how fast, and can I afford it?"
What SEBI's studies found
SEBI has published studies of individual traders in the equity F&O segment, looking at their profits and losses across full financial years. The findings were consistent and stark: a large majority of individual F&O traders made net losses, and only a small minority made meaningful profits. The studies also found that transaction costs — brokerage, exchange charges and taxes — added significantly to traders' losses, and that many loss-making traders kept trading year after year.
These findings shaped several measures SEBI introduced from late 2024, including higher contract sizes, limits on weekly expiries, and upfront collection of option premiums. You can read the studies on SEBI's website. The point to take away is simple: losing money in F&O is not an unlucky exception; for individual traders, it has been the common outcome.
The costs people overlook
Every F&O trade carries costs that add up with frequency:
- Brokerage on each order
- Securities Transaction Tax (STT) — rates on F&O were increased from 1 October 2024
- Exchange transaction charges, SEBI fees, stamp duty and GST
- Slippage — the gap between expected and actual execution price
Someone who trades many times a week can lose a noticeable part of their capital to costs even if their trades roughly break even.
Profits and losses from F&O are generally treated as non-speculative business income under Indian tax law, which means you may need to maintain accounts, file the right ITR form, and in some cases get a tax audit. Check the current rules with a tax professional.
Questions to ask before trading F&O
Be honest with yourself on each of these:
- Do I understand exactly how this contract works — expiry, lot size, margin, settlement?
- What is my maximum possible loss on this position, and could I afford to lose it all?
- Is this money I need for an emergency, a loan EMI, or a near-term goal? If yes, it shouldn't be here.
- Do I have a written plan for when to exit — both on a profit and on a loss?
- Am I trading because of a forwarded message, a video or a WhatsApp group? That is a red flag, not a strategy.
- Have I achieved my basic financial goals first — emergency fund, insurance, long-term investing?
If you're looking to build wealth over years rather than days, approaches like SIPs and sensible asset allocation are built for that purpose. F&O is a different activity altogether.
Investments in securities markets are subject to market risks; read all related documents carefully. Derivatives trading involves leverage and can result in losses exceeding the amount invested.
Frequently asked questions
Can I lose more than I invest in futures?
Yes. In futures, and when selling options, a sharp move can create losses larger than the margin you deposited. You remain liable for the shortfall.
Is buying options safer than selling them?
An option buyer's loss is capped at the premium, so the worst case is clearer. But that doesn't make it safe — many bought options expire worthless, and frequent buying can steadily erode capital.
Do I need income proof to trade F&O?
Yes. Brokers require income or net-worth proof before activating the derivatives segment, as part of checking whether the product suits you.
Key takeaways
- Futures and options are leveraged contracts; small price moves can mean large gains or losses on your capital.
- Lot sizes and margins mean each position carries significant exposure.
- SEBI's studies found that a large majority of individual F&O traders lost money.
- Costs and taxes add up quickly with frequent trading.
- Ask hard questions about maximum loss and affordability before placing a single trade.
If you would like to understand long-term investing options instead, our team can walk you through them — see our investment services.
