Derivatives: Futures & Options (F&O)

Warning: 9 out of 10 individual traders lose money in F&O. This lesson is for education only, not a recommendation to trade.

What is a Derivative?

A contract whose value is "derived" from an underlying asset (Stock, Index, Gold).

• If Reliance stock goes up, Reliance Futures go up.
• Reliance is the Asset. Reliance Future is the Derivative.

1. Futures Contract

An agreement to buy/sell an asset at a fixed price on a future date.

Example:

• Spot Price of Reliance: ₹2500.
• You think it will go to ₹2600 next month.
• You buy Reliance Futures at ₹2510.
• Expiry: Last Thursday of the month.
• Scenario A: Price goes to ₹2600. You make profit: (2600 - 2510) * Lot Size.
• Scenario B: Price falls to ₹2400. You lose money.

Key Feature: You have an obligation to settle. Profit/Loss is unlimited (linear).

2. Options Contract

Gives you the Right (but not obligation) to buy/sell.

Call Option (CE)

• Buy this if you think market will go UP.
• You pay a "Premium" (Token money).
• Max Loss: Premium paid.
• Max Profit: Unlimited.

Put Option (PE)

• Buy this if you think market will go DOWN.
• You pay a Premium.
• Max Loss: Premium paid.
• Max Profit: Unlimited (until stock hits 0).

Option Selling (Writing)

• Selling a Call or Put.
• Max Profit: Premium received (Limited).
• Max Loss: Unlimited.
• "Option Sellers eat like chickens and shit like elephants." (Small wins, one big loss).

Why is F&O Dangerous?

Leverage.

• To buy 250 Reliance shares: You need ₹6.25 Lakhs.
• To buy 1 Lot (250 qty) of Reliance Futures: You need only ₹1 Lakh (Margin).
• Result: If price moves 1%, your capital moves 6%.
• Risk: You can lose your entire capital in minutes.

Hedging (The Real Purpose)

F&O was created for Hedging (Insurance), not gambling.

Example:

• You own ₹10 Lakhs of stocks.
• You fear a market crash.
• You Buy Put Options of Nifty.
• If market crashes, your stocks fall, but Put Option profit covers the loss.

7-Day Action Plan

Day 1: Do NOT activate F&O segment on your broker app yet.
Day 2: Watch a video on "Call vs Put Options".
Day 3: Understand "Lot Size" and "Expiry Date".
Day 4: Learn about "Option Greeks" (Delta, Theta, Vega).
Day 5: Observe the "Option Chain" on NSE website. See where Open Interest (OI) is highest.
Day 6: Paper Trade (Virtual Trading) for 1 month. Note your losses.
Day 7: If you still want to trade, start with 1 lot of Nifty (Index), not Stocks. Keep strict Stop Loss.

Quiz

💡 Final Wisdom: F&O is a double-edged sword. It can hedge your portfolio or chop off your head. Handle with extreme care.