Level 11 of 13 · Futures and options
Advanced Trading: Futures and Options (F&O)
By the end you will: understand advanced derivatives.
Please read this first. Futures and options are derivatives: contracts whose value comes from something else (a stock or an index). They use leverage, have expiry dates and can lose money very quickly. SEBI’s September 2024 study found that about 93% of individual F&O traders lost money over FY2022–FY2024, with average losses of about ₹2 lakh per person. Learn this level to understand derivatives, and practise with virtual money for a long time before even considering real money. All prices here are hypothetical. Nifty examples use a lot size of 65.
Start with 11.1: What are futures?
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Futures trading
- 11.1What are futures?A future is an agreement to buy or sell something at a fixed price on a fixed future date.
- 11.2What is a futures contract?An exchange-traded futures contract specifies the underlying (e.g. Nifty or Reliance), lot size, expiry date and price. Indian equity…
- 11.3Why do futures contracts exist?For risk transfer: people who want to reduce risk (hedgers) pass it to people willing to take it (speculators).
- 11.4What is lot size (in F&O)?The fixed number of units in one contract. You can only trade whole lots.
- 11.5What is an expiry date?The last day a contract exists. After expiry it is settled and ends.
- 11.6What is the margin requirement in futures?To trade futures you deposit a margin, a % of contract value (SPAN + exposure margin), rather than the full amount.
- 11.7What is mark-to-market (MTM)?Mark-to-market means profits and losses on futures are settled every day at the day’s settlement price.
- 11.8How does futures profit and loss work?Profit/loss = (Exit − Entry) × Lot for a long (buy); the reverse for a short (sell).
- 11.9What is hedging?Hedging means taking a position that offsets the risk of another position, like insurance.
- 11.10What is speculation?Speculation is taking a position purely to profit from a predicted price move, accepting high risk.
- 11.11What is rollover?Rollover means closing a futures position in the expiring month and opening the same position in the next month.
- 11.12What are futures trading risks?The main risks of trading futures.
Options trading
- 11.13What are options?An option gives the buyer the right, but not the obligation, to buy or sell an underlying at a fixed price (the strike) on or before…
- 11.14What is a call option?A call option gives the right to buy at the strike price. Buyers profit if the price rises above strike + premium.
- 11.15What is a put option?A put option gives the right to sell at the strike price. Buyers profit if the price falls below strike − premium.
- 11.16What is a strike price?The fixed price at which the option holder can buy (call) or sell (put).
- 11.18What is an option’s expiry date?The last day the option can be exercised. Indian index options are European style: settled only at expiry, in cash.
- 11.19Who is an option buyer?The option buyer (holder, "long") pays the premium and gets the right.
- 11.20Who is an option seller?The option seller (writer, "short") receives the premium and takes on the obligation.
- 11.21What is ITM (In the Money)?An option is in the money if it has intrinsic value: a call with strike below the current price, or a put with strike above it.
- 11.22What is ATM (At the Money)?An option is at the money when its strike is equal (or closest) to the current price.
- 11.23What is OTM (Out of the Money)?An option is out of the money if it has no intrinsic value: a call with strike above spot, or a put with strike below spot.
- 11.24What is intrinsic value?The value an option would have if exercised right now.
- 11.25What is time value?The part of the premium above intrinsic value: what buyers pay for the chance that the option becomes more valuable before expiry.
- 11.26What is open interest?Open interest (OI) is the total number of outstanding (not yet closed) contracts for a strike or future.
- 11.27What is implied volatility (IV)?Implied volatility is the volatility the market expects, worked backwards from option prices.
- 11.28What is delta?Delta shows how much an option’s premium changes for a ₹1 (or 1-point) change in the underlying. Calls: 0 to 1. Puts: 0 to −1.
- 11.29What is gamma?Gamma measures how fast delta changes when the underlying moves.
- 11.30What is theta?Theta is time decay: how much premium an option loses each day, all else equal.
- 11.31What is vega?Vega shows how much premium changes for a 1% change in implied volatility.
- 11.32What is an option chain?An option chain is a table listing all strikes for an expiry, with calls on one side and puts on the other, showing premium (LTP), OI,…
- 11.33What is PCR (Put-Call Ratio)?PCR = total put OI ÷ total call OI for an expiry.
- 11.34What is max pain?Max pain is the strike at which option buyers as a group would lose the most (sellers gain most) at expiry, calculated from OI.
- 11.35What is option hedging?Using options to limit losses on existing positions, e.g. buying a put on a stock you own, or buying a protective option against a short…
Options strategies
Every strategy below shows when it’s used, max profit, max loss, breakeven, a worked example and its payoff diagram. Payoffs are at expiry, for one Nifty lot (65) with hypothetical premiums. "Limited risk" means the worst loss is known in advance; "unlimited" means it isn’t.
- 11.36Long CallBuy a call option.
- 11.37Long PutBuy a put option.
- 11.38Covered CallOwn the stock (or underlying) and sell a call on it.
- 11.39Protective PutOwn the stock and buy a put on it.
- 11.40Bull Call SpreadBuy a lower-strike call and sell a higher-strike call (same expiry).
- 11.41Bear Put SpreadBuy a higher-strike put and sell a lower-strike put (same expiry).
- 11.42Iron CondorSell an OTM put and an OTM call, and buy further-OTM put and call for protection (four legs).
- 11.43Straddle (Long)Buy a call and a put at the same strike (usually ATM).
- 11.44Strangle (Long)Buy an OTM call and an OTM put at different strikes.
- 11.45Limited-risk vs potentially unlimited-risk positionsA clear list of which F&O positions have a known maximum loss and which do not.
- 11.46Why beginners should learn and practise before trading F&OF&O combines leverage, time decay, volatility and complex payoffs. Mistakes are expensive and fast.