F&O stands for Futures and Options, two types of derivative contracts that let you trade based on the expected price movement of an underlying asset (like a stock index or individual stock) without owning the asset itself. In India, F&O trading happens primarily on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), with contracts available on major indices like Nifty and Sensex as well as on individual securities. It’s one of the most actively traded segments of the Indian stock market, though it comes with significant risk and a regulatory framework that has tightened considerably in recent years.
Futures vs. Options: The Core Difference
A futures contract requires both the buyer and the seller to transact a specific asset at a set price on a future date, unless the position is closed before expiry. If you buy a Nifty futures contract at 24,000 and the index rises to 24,500, you profit from the difference. But if it falls, you absorb the loss. Neither side can walk away from the obligation.
An options contract works differently. It gives the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price (called the strike price) before the contract expires. A call option gives you the right to buy at the strike price, while a put option gives you the right to sell. The buyer pays a premium upfront for this flexibility. If the market moves against you, you can simply let the option expire and your maximum loss is the premium you paid.
This distinction matters in practice. Futures expose you to unlimited profit and unlimited loss in either direction. Options cap your loss at the premium if you’re buying, but if you’re selling (writing) options, your risk can be substantial.
How F&O Contracts Work
F&O contracts are standardized. Each contract covers a fixed number of shares or units of an index, known as the lot size. You can’t trade one share in the derivatives segment; you trade in lots. For example, a Nifty options contract has a defined lot size, so even a small move in the index translates into a meaningful gain or loss when multiplied across the lot.
Every contract has an expiry date. Weekly expiries are now restricted to just two indices: Nifty and Sensex. Monthly contracts expire on the last Thursday of each month. When a contract expires, any open positions are settled based on the closing price of the underlying asset.
Margins and Upfront Costs
You don’t pay the full value of the contract upfront. Instead, you post an initial margin, a percentage of the contract’s total value that acts as a security deposit. NSE Clearing calculates initial margins using a risk model based on 99% value at risk. For futures, this margin is computed over a two-day time horizon to account for overnight settlement gaps.
If the market moves against your position during the day, you may face a margin call requiring you to add funds. Random intraday margin checks by exchanges mean even a temporary shortfall can attract an immediate 1% penalty. Brokers are no longer permitted to offer intraday credit for options buying, so you must pay the full premium upfront when purchasing options.
Who Trades F&O and Why
F&O attracts two broad categories of participants. Hedgers use derivatives to protect existing investments. A portfolio manager holding a basket of stocks might buy Nifty put options before an uncertain event like a budget announcement. If the market drops, the put options gain value and offset losses in the stock portfolio. The goal isn’t to make money on the derivative itself; it’s to neutralize risk.
Speculators, on the other hand, trade F&O purely to profit from price movements. They take positions based on their view of where the market is heading, accepting higher risk in exchange for the possibility of higher returns. Because F&O contracts are leveraged (you control a large position with a relatively small margin), even modest price swings can produce outsized gains or losses. This leverage is what makes derivatives attractive to speculators and dangerous for inexperienced traders.
Recent SEBI Regulations
India’s market regulator, SEBI, has tightened the rules around F&O trading substantially. These changes are designed to reduce excessive speculation by retail traders, many of whom have historically lost money in derivatives.
- Weekly expiries limited: Multiple indices previously offered weekly expiries spread across six days of the week. Now only Nifty and Sensex have weekly expiries, reducing the number of short-dated contracts that tend to attract high-risk bets.
- Higher transaction taxes: The securities transaction tax on futures has increased to 0.05% from 0.02%. On options, the STT has been raised to 0.15% from the earlier rates of 0.1% on premiums and 0.125% on exercise.
- Extra margin on expiry-day selling: An additional 2% margin is imposed on option selling positions on expiry day, when price swings tend to be sharpest.
- No calendar spread relief on expiry: Calendar spread margin benefits (which normally reduce the margin required when you hold offsetting positions in different expiry months) drop to zero on expiry days. Traders must post full margins on both legs.
- Full premium required for options buying: Brokers cannot extend intraday credit for purchasing options, eliminating a practice that previously let traders take on positions larger than their account balance.
Together, these changes increase the cost and capital required to trade F&O, particularly for small retail traders who relied on low margins and frequent weekly expiries.
How F&O Profits Are Taxed
F&O income is classified as non-speculative business income under Indian tax law. This applies to both intraday and overnight positions. Unlike capital gains from stocks, which are taxed at fixed rates, F&O profits are added to your total income from all sources (salary, rental income, interest, other business income) and taxed according to the income tax slab you fall into.
This classification has practical advantages. Because F&O income is treated as business income, you can deduct trading-related expenses: brokerage fees, internet costs, data subscriptions, and similar costs directly connected to your trading activity. Starting from FY25, traders report F&O income under a dedicated business code (21010) rather than a generic “other” category.
Losses work differently than stock market losses. Non-speculative losses from F&O can be set off against any other business income in the same year, except salary income. If you can’t fully offset the loss, you can carry it forward for up to eight years, but it can only be set off against future non-speculative business income. If your F&O trading generates a loss, you’ll need to file your return before the deadline to preserve the right to carry it forward.
What You Need to Start Trading F&O
To trade F&O in India, you need a trading account with a broker that offers derivatives access, along with a linked demat account. Most brokers require you to complete a separate activation step for the F&O segment, which typically involves agreeing to risk disclosures and confirming your income or net worth meets minimum thresholds.
Before placing your first trade, make sure you understand the margin requirements for the specific contracts you plan to trade. Margins vary by contract and can change based on market volatility. Keep more capital in your account than the bare minimum margin to avoid penalties from intraday margin shortfalls. And be aware that the combination of leverage, transaction taxes, and the time decay built into options pricing means that consistent profitability in F&O requires both skill and discipline.