Futures and Options Basics: How F&O Works and What It Costs

What futures and options are

A futures contract is an agreement to buy or sell an underlying (an index or a stock) at a set price on a set date. Both sides are obliged to honour it. An options contract gives the buyer the right — not the obligation — to buy (a call) or sell (a put) at a set price before expiry. The buyer pays a premium; the seller (the writer) takes on the obligation.

Both are derivatives: their value is derived from the underlying asset. They trade in fixed lot sizes and expire on a set day (weekly or monthly), so an F&O position does not simply sit in your account the way a delivery holding does.

Leverage and margin

F&O positions are leveraged. You post a margin — a fraction of the contract value — rather than the full amount, which magnifies both gains and losses. Since SEBI's peak-margin framework was fully phased in during 2021, the margin collected upfront reflects the exchange's VaR + ELM for the contract, and any shortfall attracts exchange penalties.

Why most individual F&O traders lose

SEBI's own study of individual traders in equity F&O found that 93% incurred losses between FY22 and FY24, with aggregate losses exceeding ₹1.8 lakh crore over the three years. That single finding is the most important fact for anyone weighing up F&O: the average retail participant does not come out ahead.

What F&O costs

Every leg of every trade carries charges:

• Brokerage — a flat fee per order (often ₹20) or a per-lot fee, charged on each buy and each sell.
• STT — on the sell side (for options, on the premium; for futures, on the sell value).
• Exchange transaction charges, the SEBI turnover fee, stamp duty (on the buy side) and 18% GST on brokerage and most levies.

Because a strategy can involve several legs and frequent rollovers, these charges compound quickly. Run your own numbers in the brokerage calculator before you trade, and compare the per-order and per-lot rules on our options trading list.

Expiry and assignment

Options have an expiry date. A long option that finishes out of the money expires worthless, and the buyer loses the premium paid. If you write options, you carry the risk of assignment and of a large move against you.

Who should avoid F&O

Beginners, anyone using borrowed money, and anyone who cannot yet explain margin, expiry and assignment should stay away until they have studied the mechanics. If you want equity exposure without leverage, delivery investing and index funds carry far less risk.

Related: What is margin trading · Best brokers for F&O · How brokerage charges work.