Many new traders enter the stock market and quickly end up hearing about F&O trading. The term sounds technical, but the idea behind it is quite simple once you understand why these contracts exist. Futures and options were originally created to help businesses and investors deal with price uncertainty. Over time, they evolved into powerful trading instruments used for hedging and speculation.
Futures and options are two kinds of derivative contracts, which are abbreviated as F and O. A derivative is a financial instrument whose value derives from an underlying asset. This investment is typically a stock, index, commodity or currency.
What Are Futures?
A future is an agreement or a contract that you enter into to buy or sell an asset at a fixed price on a specific date. Both parties are obligated to honour the contract. There is no backing out simply because the market moves in an unexpected direction.
Key Pointers To Be Aware About:
- In F&O trading online, the buyer and seller must complete the deal at expiry.
- Futures involve high leverage, meaning you only pay a margin instead of the full amount.
- Profits and losses move quickly because even small price changes are magnified.
- Futures are often used by traders who want clear, directional bets or by investors who need to hedge large positions.
What Are Options?
An option gives you the right—but not the obligation—to buy or sell the underlying asset. This one difference makes options more flexible than futures.
There are two types:
- Call option: Right to buy at a fixed price.
- Put option: Right to sell at a fixed price.
If the market doesn’t favour your expectations, you can let the contract expire. Your loss is limited to the premium you paid. This built-in protection is why many beginners start with options rather than futures.
Why Do People Trade F&O?
Every investor tends to trade F&Os for different reasons:
- Hedging: Investors holding stocks may use FnO to protect themselves from sudden price drops.
- Speculation: Traders often use derivatives to take short-term positions with limited capital.
- Leverage: Since margins are low, the potential returns are higher—but so are the risks.
- Income strategies: Some advanced traders use options to generate regular premium income.
Benefits of F&O Trading
- Allows traders to take positions with relatively small amounts of capital.
- Helps investors protect long-term portfolios.
- Offers strategies for different market conditions—rising, falling, or sideways.
- Provides flexibility through a wide range of strike prices and expiry dates.
Risks You Should Not Ignore
Despite the advantages, F&O trading is not for everyone. Derivatives can turn against traders quickly. A sudden price move can wipe out the entire margin within minutes. Many beginners also forget that weekly options lose value as expiry approaches, a phenomenon known as time decay.
Before venturing into this segment, it is important to have a disciplined attitude, position sizing and the knowledge of how each contract will perform. The longer you take to learn how derivative prices respond to market news, volatility and time decay, the more you can make a good decision.