The Ultimate Guide for Derivatives: Futures and Options Trading
Introduction In derivatives trading, stock price changes are profit-making opportunities for the investors without them ever physically owning the stocks. It is a market that provides itself to risk management or making quick bucks. As of March 2025, the National Stock Exchange (NSE) contains 217 stocks in the Futures and Options (F&O) list. This proliferation manifests the growing importance of derivatives in the Indian market. Understanding futures and options is the key for traders and investors to survive in this highly competitive environment. The market activities are heavily regulated by SEBI, which promotes fair trading and transparency. Understanding Derivatives: An Introduction What Are Derivatives? Derivatives are financial contracts whose value varies with the price of some other asset, such as stocks. They are used either to protect investments or to make profits by betting on price moves. The principal types are futures, options, and swaps. These help traders to avoid risks or speculate on price changes without taking ownership of the actual asset. The Role of SEBI in Derivatives Trading SEBI, the Securities and Exchange Board of India, is the regulator for all derivatives trades. It formulates rules and regulations to keep the market safe and transparent. SEBI, in 2025, gave new directions for making the market more stable and less subject to manipulation while also protecting investors. These included tightening margin and trading limits. Benefits of Trading Futures and Options Futures and options offer many advantages to investors. They protect against losses(i.e., hedging). Speculators use futures and options to increase profits from small initial investments. Other derivatives help the discovery of fair stock prices and add transparency to the market. Exploring Different Types of Futures Contracts In the Indian financial markets, futures contracts are available across multiple asset classes — stocks, indices, commodities, and currencies. Understanding each type is crucial for traders and investors looking to diversify their strategies. Stock Futures Standardized: a contract between the two persons in which they determine the specific quantity of the stock to buy or sell at the predetermined future date for a particular price. At present, March 2025, 217 of the stocks in the Indian stock market are recognized for trading in F&O in NSE. This is further classified into different sectors, for example, banking, IT, automobiles, pharmaceutical sectors, etc. Example Companies Available for Stock Futures Trading: Company Name NSE Symbol Sector Reliance Industries Limited RELIANCE Energy/Conglomerate Infosys Limited INFY Information Technology HDFC Bank Limited HDFCBANK Banking Tata Consultancy Services TCS Information Technology ICICI Bank Limited ICICIBANK Banking Bharti Airtel Limited BHARTIARTL Telecom Larsen & Toubro Limited LT Engineering & Construction Bajaj Finance Limited BAJFINANCE NBFC (Financial Services) Key Features: Lot Size: Like all stock futures, all stocks have a defined lot size. For example, Reliance has 250 in the lot size where 250 shares constitute one lot. Margin Requirement: The trader must pay the initial margin amount which is generally 20-25% of the entire value of contract in trade. Settlement: Cash-settled on expiry of contract, which means no delivery of shares. 📌Stock Futures serves the purpose of Hedging towards individual stock positions or leveraged exposure into stock movement. 2. Index Futures Contracts based on an index rather than individual stocks are called index futures. These contracts provide wider market exposure with highly liquidity. Popular Index Futures on NSE: Index Name Description NIFTY 50 India’s flagship index comprising 50 major companies across sectors. BANKNIFTY Covers 12 of the most liquid and large-cap banking stocks. FINNIFTY Represents the diversified financial services sector (banks, NBFCs, insurance). MIDCPNIFTY Focuses on mid-cap companies. Popular Index Futures on BSE: Index Future Description S&P BSE SENSEX Futures Futures contract based on BSE’s 30 largest and most traded stocks. S&P BSE BANKEX Futures Futures contract tracking major banking sector companies on BSE. S&P BSE SENSEX 50 Futures Futures based on the top 50 companies listed on the BSE exchange. S&P BSE Bharat 22 Index Futures Futures based on a diversified basket of 22 Public Sector Enterprises (PSEs). S&P BSE 100 Futures Futures tracking the top 100 listed companies for broader market exposure. Key Features: Diversification: One index future represents a portfolio of stocks. Low Volatility: Compared to single stocks. Cash Settlement: No delivery of stocks at expiry — cash-settled based on index closing value. 📌 Index Futures work best for traders having a view on the general market or sector movement rather than on particular companies. 3. Commodity Futures Commodity Futures allow trading in essential goods like metals, energy products, and agricultural produce. In India, commodity futures are primarily traded on the Multi Commodity Exchange (MCX). Major Commodity Futures: Commodity Description GOLD A traditional safe-haven asset, ideal during economic uncertainty. SILVER Industrial and investment demand makes silver highly volatile. ZINC Widely used for galvanizing steel to prevent corrosion. COPPER Essential for construction, electronics, and manufacturing industries. CRUDE OIL Vital for the global economy; sensitive to geopolitical events. Key Features: 📌 Commodity Futures are useful for both hedging and speculation based on global supply-demand dynamics. 4. Currency Futures Currency Futures help traders hedge against currency risk or speculate on forex movements. These are traded on platforms like the NSE and BSE in India. Popular Currency Futures Pairs: Currency Pair Description USDINR U.S. Dollar against Indian Rupee. EURINR Euro against Indian Rupee. JPYINR Japanese Yen against Indian Rupee. GBPINR British Pound against Indian Rupee. Key Features: 📌 Currency Futures are essential for exporters, importers, and global investors managing foreign exchange risks. Options Trading: Deep Dive What Are Options and Types of Them Options give traders the right but not the obligation to buy or sell an underlying stock at a specific price before expiration. Options can either be exercised before expiry for example, American options, or at expiry only for example, European options. How Options Trading Operates Options can either be in-the-money (making money), at-the-money, or out-of-the-money. Pros and Cons of Options Trading They can be used to hedge or speculate. The losses will never exceed the premium paid. However, there is a risk of losing the premium if the