Why F&O?

Futures and options (F&O) let you hedge, speculate with defined risk, and use capital efficiently. Done right, they add flexibility to a portfolio; done casually, they amplify mistakes. This guide covers the essentials, India-specific context, and practical setups you can actually execute.

The Building Blocks
Futures (linear payoff)

What: A contract to buy/sell an asset later at a price agreed today.

Use cases: Hedge equity exposure, express directional views, pair trades.

Key traits: Mark-to-market daily; profit/loss moves rupee-for-rupee with the underlying (leverage via margin).

Options (asymmetric payoff)

Call = Right to buy. Put = Right to sell.

Buyer: Limited risk (premium), potentially large reward.

Seller/Writer: Limited reward (premium), potentially large risk; margin required.

Market Basics (India)

Exchanges: NSE (equity & currency derivatives), BSE (select derivatives), MCX (commodities).

Expiry: Weekly & monthly for indices; monthly for many stocks/commodities.

Lots: Traded in fixed lot sizes set by the exchange.

Margins: SPAN/Exposure (for futures & short options). Premium fully paid for long options.

Regulation: SEBI-regulated; brokers provide RMS rules, risk disclosures, and option chains.

Payoff Intuition (fast math)

Long Future: P/L ≈ Lot Size × (Futures Price – Entry).

Long Call: Intrinsic Value = max(Spot – Strike, 0). P/L = Intrinsic – Premium.

Long Put: Intrinsic Value = max(Strike – Spot, 0). P/L = Intrinsic – Premium.

Short Option: P/L ≈ Premium received – Intrinsic (risk can be large unless hedged).

Greeks in One Breath

Delta (direction): how much option moves for ₹1 move in the underlying.

Gamma (acceleration): how fast delta changes—vital around breakouts/expiry.

Theta (time decay): friend to option sellers, enemy to buyers (especially near expiry).

Vega (volatility): options expand with higher IV and contract when IV falls.
Focus: match strategy to IV regime and time to expiry.

Strategy Menu (with when to use)
1) Directional but defined risk: Debit Spreads

Bull Call Spread (buy ATM call, sell OTM call): reduces cost & theta burn.

Bear Put Spread (buy ATM put, sell OTM put): tidy way to short with capped loss.
Use when IV is moderate/low and you expect a move.

2) Income with protection: Credit Spreads

Bear Call Spread (sell OTM call, buy higher OTM call)

Bull Put Spread (sell OTM put, buy lower OTM put)
Use when IV is elevated and you expect the market to stay below/above your short strike. Always define risk with a hedge.

3) Volatility plays

Long Straddle/Strangle: buy call + put to bet on a big move; needs rising IV or strong breakout.

Iron Condor: two credit spreads to harvest theta in ranges—works best in higher IV, quiet price action.

4) Futures with a seatbelt

Hedged Futures: long futures + protective OTM put (synthetic call) or short futures + protective call.

Use when you want futures’ clean exposure but with capped downside.

Worked Example (illustrative)

View: Expect NIFTY 50 to drift higher over the next 2–3 weeks, move ≈ +1.5%.

Setup: Bull Call Spread

Buy 1 lot NIFTY 22,600 Call @ ₹150

Sell 1 lot NIFTY 22,900 Call @ ₹70

Net debit: ₹80 × lot size

Max Loss: ₹80 × lot size (if NIFTY ≤ 22,600 at expiry)

Max Gain: (22,900 – 22,600 – 80) × lot size = ₹220 × lot size

Break-even: 22,680 at expiry (ignoring costs).
Why it works: limited risk, decent upside if the trend grinds up; cheaper than naked call.

(Numbers are for illustration only; check live prices, lot sizes, and brokerage/fees.)

Risk Framework (non-negotiable)

Pre-define risk per trade (e.g., 0.5–1.0% of capital).

Always use defined-risk structures (spreads) or protective legs; avoid naked shorts.

Respect margins & liquidity (slippage is real).

Avoid event landmines (policy days, major results) unless you’re explicitly trading volatility.

Review: log entry reason, exit trigger, R multiple, and a post-trade note.

Trade Checklist

Thesis & timeframe (intraday, weekly, positional).

IV regime & event calendar checked.

Strike selection near technical levels (support/resistance/VWAP).

Entry/exit rules (price/IV/time-based).

Risk per trade and portfolio-level exposure set.

Contingency: what invalidates the idea?

Common Pitfalls to Avoid

Over-leveraging on futures; treating margin as a discount.

Buying far OTM lottery tickets—cheap, but low probability.

Holding to zero: manage winners/losers; don’t let theta implode positions.

Ignoring costs: brokerage, STT, GST, stamp duty, SEBI charges add up.

FAQs

Is options buying safer than futures?
Risk is capped for buyers, yes—but theta decay means timing matters. Spreads often balance cost and probability better than naked longs.

Why do many traders sell options instead?
Time decay works in their favor, but only with strict risk limits and defined-risk spreads.

Can F&O be used for hedging long stocks?
Yes—protective puts, covered calls, or collar strategies can reduce drawdowns while staying invested.

Bottom Line

F&O isn’t about hero trades. It’s about structured bets, defined risk, and repeatable process. Start with small size, use spreads, respect IV, and let discipline—not emotion—drive decisions.

Disclosure: Educational content only, not investment advice. Derivatives involve significant risk and may not be suitable for all investors. Verify live contract specs, margins, costs, and tax implications with your broker.