A future is an agreement to buy or sell something at a fixed price on a fixed future date, binding on both sides. An option is the right to do so without the obligation, bought by paying a premium. The easiest way to understand both is with a farmer and a biscuit company.
The farmer will harvest wheat in three months and has no idea what it will sell for. The biscuit company will need wheat in three months and has the same problem in reverse. So they agree today: a fixed quantity, at a fixed price, delivered in three months. Both have removed the uncertainty they could not afford.
That is the basic idea behind a futures contract. The rest builds on this idea.
Now change one thing: suppose the biscuit company is not certain it will need the wheat. It pays the farmer a small sum today for the right to buy at the agreed price in three months, and the freedom to walk away if it turns out not to want it. The farmer keeps that sum either way.
That is an option. The small sum is the premium.
Everything below is detailed.
The key difference
A future is an obligation. Both sides must go through with it. If the price moves against you, you cannot decline.
An option is a right for the buyer and an obligation for the seller. The buyer can walk away, and loses only the premium if they do. The seller cannot walk away, and has taken on the risk in exchange for the premium.
That difference is the key: the buyer has a choice, while the seller has an obligation.
Calls and puts
There are two kinds of options, and the names are unhelpful.
A call is the right to buy at a set price. You want it if you expect the price to rise.
A put is the right to sell at a set price. You want it if you expect the price to fall, or if you own something and want protection against it falling.
The set price is called the strike price. The date the right expires is the expiry. The amount you pay for the right is the premium.
Those four terms cover most of the basic vocabulary.
Why an option can lose value over time
An option loses value as expiry approaches, and the reason follows from the wheat example rather than from any formula. This is the part that catches people.
You are paying for the possibility that something happens before a deadline. With three months to go, there is more time for the price to move. With three days to go, there is less time. As expiry gets closer, that possibility becomes less valuable.
An option can therefore lose value even when the price of the underlying asset does not move much. Being right about the direction is not enough. The move also needs to be large enough and happen before expiry.
Option sellers are on the other side of this trade. As expiry approaches, the time value they sold also reduces.
What this looks like in India
The basic concepts are universal, but the Indian market rules and numbers can change. The figures below are therefore only current as of the date of publication.
You cannot buy one unit. Contracts trade in fixed lots, and a lot is the fixed number of units in one contract. At the time of writing in August 2026, a Nifty 50 lot is 65 units, a Bank Nifty lot is 30 and a Sensex lot is 20. SEBI has prescribed contract values to sit in a band of roughly ₹15 lakh to ₹20 lakh for index derivatives, with exchanges adjusting lot sizes as index levels change. That is the notional value: the value controlled by the contract, not the amount you pay upfront. An option buyer puts up only the premium, which can be a few thousand rupees. A futures position or a sold option requires margin, which is a fraction of the contract value but far more than a premium.
Expiry days differ by exchange. Since September 2025, NSE's index derivative contracts expire on Tuesdays and BSE's on Thursdays, following a SEBI direction that expiries happen only on those two days. Monthly contracts expire on the last such day of the month.
Weekly contracts exist on two indices only. Nifty 50 on the NSE and Sensex on the BSE. Bank Nifty, FinNifty and the others are monthly and quarterly now. Before November 2024 there were weekly expiries across several indices on both exchanges, which meant an expiry almost every day of the week. SEBI ended that deliberately.
Individual stocks have derivatives too, on a monthly cycle, but only on a restricted list of the larger and more heavily traded companies rather than on everything listed. The exchanges maintain the eligible list using criteria prescribed by SEBI and update it periodically.
The trading day is different for these stocks. Stocks with derivative contracts now stop continuous trading at 3:15 and close through an auction, while the derivatives themselves trade until 3:40.
Margin, in plain terms
If you buy an option, the premium you pay is your maximum loss on that option position. The contract can become worthless and you cannot lose more than you put in. Since February 2025 that premium is collected upfront in full.
The rules are different for futures and sold options.
If you sell an option or take a futures position, you must maintain margin as security for the position. For futures, the position is marked to market and losses may require additional funds as they arise. For a sold option, the exchange requires margin against the potential loss, and the requirement can change as the position and market move. If the position moves against you far enough, your broker asks for more. If you do not provide it, your broker closes the position.
The loss on a sold option is not capped at what you deposited. This is one of the most important risks to understand before trading F&O.
What it costs
Costs are higher than on ordinary share trades and rose again in April 2026.
Securities transaction tax on futures rose to 0.05 per cent on the sell side on 1 April 2026, from 0.02. On options it rose to 0.15 per cent of the premium when sold, from 0.10. Brokerage, exchange charges, stamp duty and GST can also apply, depending on the transaction and broker.
See exactly what a derivatives trade costs on Hem Nxt before you place one.
Who these are actually for
Derivatives can be used in several ways. Three common ones are hedging, selling options for premium income, and taking a directional view with leverage.
Hedging. Someone holding a portfolio buys a put, accepting a known cost to limit an unknown loss. This is the basic hedging idea behind derivatives, and it is what the farmer and biscuit company were doing.
Selling options. A trader may sell options to collect premium, hedge another position or take a view on volatility. The premium is limited income; the potential loss can be much larger. Professional option sellers generally use substantial capital, hedging and risk-management systems.
Taking a directional view with leverage. Legal, available and the reason most retail participants are here. It is also the activity where SEBI’s data shows most individual traders losing money: 91 per cent in FY25, with aggregate net losses of ₹1,05,603 crore after transaction costs.
The data shows that losses are common among individual traders. We cover the underlying data in a separate post.
Before you go near them
Three things to understand before trading.
Before trading derivatives, brokers are required to collect financial information from you and may ask for supporting documents. Depending on the broker and the information you provide, this could include an income-tax return, salary slip, bank statement or net-worth statement. The requirement is meant to establish your financial profile before you take on the higher risks associated with derivatives trading.
The minimum position is large. At ₹15 lakh and up in contract value, one lot represents substantial exposure even where the premium looks small.
Leverage means controlling a position worth far more than the money you have put up. It is not a feature that makes returns bigger. It is a multiplier that works identically in both directions, and the direction it works in is not something you control.
Common questions
What are futures and options in simple terms?
A futures contract is an agreement to buy or sell an underlying at a specified price on a specified future date. Both sides are obligated to the contract. An option is the right to do so without the obligation, bought by paying a premium.
What is the difference between a call and a put?
A call is the right to buy at a set price. A put is the right to sell at a set price. You buy a call expecting a rise and a put expecting a fall, or to protect something you already own.
What is a strike price?
The price at which the option lets you buy or sell, fixed when the contract is created and unchanged for its life.
What is an option premium?
The price the buyer pays the seller for the option. For a buyer of an option, the premium is the maximum amount that can be lost on the option itself. For the seller, it is the maximum premium income received before costs, but the potential loss can be much larger.
Why does my option lose value when the price has not moved?
Because you are paying for the chance of something happening before a deadline, and the time remaining is shrinking. That loss of value accelerates as expiry approaches.
What is a lot-size in F&O?
The fixed number of units in one contract. You cannot trade a fraction of it. Exchanges set lot sizes so contract values stay in the range SEBI requires, and revise them as index levels change.
When do F&O contracts expire in India?
NSE contracts on Tuesdays and BSE contracts on Thursdays, since September 2025. Weekly index options are currently available only on Nifty 50 on NSE and Sensex on BSE.
How much margin is required for options?
Buying an option requires the premium upfront; for a standalone long option position, that premium is the maximum loss on the position, before transaction costs. Selling one requires margin set by the exchange, adjusted daily, with more demanded if the position moves against you.
Do I need income proof for F&O?
Brokers are required to collect financial information before enabling derivatives trading. The documents and process can vary by broker.
Is there a minimum amount I need to trade F&O?
There is no regulatory minimum net worth or minimum capital. What sets the floor in practice is the contract size, since one lot commits ₹15 lakh or more in notional value and the margin on it is substantial.
Can I lose more than I invest?
Not if you only buy options; the premium is the maximum loss on the position itself, before transaction costs. Yes if you sell options or take futures positions, where losses are not capped by what you deposited.
In simple terms
Futures and options are tools for transferring risk from someone who does not want it to someone who is paid to take it. Used that way they are useful and sometimes essential.
Using them mainly to try to turn a small amount of money into a large amount quickly is risky. The instruments themselves are not the problem; the risk comes from using leverage without fully understanding the potential losses.
Risk disclosure
Hem Finlease Private Limited, SEBI Registration No. INZ000167734. Hem Securities Limited, SEBI Reg. No. IN-DP-568-2021, CDSL: 17700/17701.
Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI and membership of recognised stock exchanges do not guarantee the performance of the intermediary or provide any assurance of returns to investors.
9 out of 10 individual traders in equity Futures & 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 costs.
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