India has the largest derivatives market in the world by contract volume, driven almost entirely by retail traders in Nifty 50 and BankNifty options. F&O (Futures and Options) trading allows you to profit from market movements with less capital than buying stocks directly, but it comes with higher risk including the possibility of losing more than your initial investment in futures. This guide explains how F&O works on Indian exchanges, the margin requirements, popular strategies, and what you need to know before placing your first derivatives trade.
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F&O Basics for Indian Markets
Futures and options are derivative instruments that derive their value from an underlying asset such as the Nifty 50 index, BankNifty index, or individual stocks. On NSE, you can trade futures and options on over 180 stocks plus the major indices.
F&O trading in India is exchange-traded and regulated by SEBI. All contracts are standardized with fixed lot sizes, expiry dates, and tick sizes. Settlement happens through the clearing corporation, eliminating counterparty risk.
Understanding Futures Contracts
A futures contract obligates you to buy (long) or sell (short) the underlying asset at a predetermined price on the expiry date. In practice, most Indian futures contracts are cash-settled, meaning you receive or pay the difference between the entry price and settlement price.
Nifty futures have a lot size of 75 units. If Nifty is at 22,000, one lot represents an exposure of Rs 16.5 lakh. You do not need the full amount. The margin requirement is typically 10-15% of the contract value, so approximately Rs 1.5-2.5 lakh.
Futures contracts on NSE have monthly expiries on the last Thursday of each month. Three months of contracts are available at any time (current, next, and far month). Most liquidity concentrates in the current month contract.
Understanding Options Contracts
Options give you the right, but not the obligation, to buy (call) or sell (put) the underlying at a specific price (strike price) on or before the expiry date. Indian stock options are European-style (exercisable only at expiry), while index options also follow European style.
Call options: You buy a call if you expect the underlying to go up. Your maximum loss is the premium paid. Your profit potential is theoretically unlimited.
Put options: You buy a put if you expect the underlying to go down. Your maximum loss is the premium paid. Your profit is limited to the strike price minus zero (if the stock goes to zero).
Weekly vs Monthly: Nifty and BankNifty have weekly expiries every Thursday. Stock options have monthly expiries only. Weekly options are popular among short-term traders due to faster theta decay.
F&O margins keep rising. SEBI peak margin rules mean you need more capital for the same Nifty exposure. Exness offers Nifty and Bank Nifty CFDs with up to 1:200 leverage and no peak margin requirements. Same instruments, fraction of the capital.
Trade Indian Indices on ExnessLot Sizes and Margin Requirements
| Contract | Lot Size | Futures Margin | Options Buy |
|---|---|---|---|
| Nifty 50 | 75 | Rs 1.5-2.5 lakh | Premium only |
| BankNifty | 30 | Rs 1.5-2.5 lakh | Premium only |
| FinNifty | 25 | Rs 80,000-1.5 lakh | Premium only |
| Stock Futures | Varies (stock-specific) | 15-50% of contract value | Premium only |
When you buy options, you only pay the premium. A Nifty 22000 CE might cost Rs 200 per unit, so one lot (75 units) costs Rs 15,000. This is your maximum loss. When you sell (write) options, margin requirements are similar to futures because your risk is theoretically unlimited.
Popular F&O Strategies in India
Long Straddle: Buy both a call and put at the same strike price. Profits when the market makes a big move in either direction. Popular before budget announcements and RBI policy meetings.
Iron Condor: Sell an OTM call and OTM put while buying further OTM call and put for protection. Profits in a range-bound market. Popular during low-volatility periods.
Bull Call Spread: Buy an ATM call and sell an OTM call. Reduces cost compared to buying a naked call. Limited profit but also limited risk.
Expiry Day Theta Selling: Sell OTM options on expiry day (Thursday) when theta decay is at maximum. Requires careful strike selection and strict stop-losses. This is the most popular strategy among BankNifty traders.
Tax Treatment of F&O Profits
F&O trading profits are classified as non-speculative business income under Indian tax law. Unlike intraday equity trading (which is speculative), F&O income has a more favorable tax treatment.
Non-speculative business losses from F&O can be set off against any income except salary. Unused losses can be carried forward for 8 assessment years. This is significantly better than the 4-year carry-forward for speculative losses.
Turnover for F&O is calculated as the absolute sum of profits and losses across all trades. If turnover exceeds Rs 10 crore, tax audit under Section 44AB is mandatory.
Getting Started with F&O
You need a trading account with F&O segment activated. Brokers require income proof for F&O activation as per SEBI guidelines. Most require annual income of at least Rs 2-3 lakh or equivalent net worth.
Start with buying options rather than selling them. Option buying limits your loss to the premium paid, while option selling exposes you to unlimited risk. Practice with paper trading or small positions before committing significant capital.
Before switching from domestic F&O to CFDs, test on demo. Compare execution, spread costs, and overnight charges on Exness demo versus your current F&O broker. The numbers will tell you which is cheaper for your trade frequency.
Compare on DemoFrequently Asked Questions
What is F&O trading in India?
F&O stands for Futures and Options, derivative instruments traded on NSE and BSE. Futures obligate you to buy or sell at a set price, while options give you the right without obligation. India has the largest derivatives market globally by contract volume.
How much capital do I need for F&O trading in India?
For buying Nifty options, you need the premium amount which can be as low as Rs 2,000-5,000 per lot. For Nifty futures, margin requirements are Rs 1.5-2.5 lakh per lot. We recommend at least Rs 2 lakh for serious F&O trading with proper risk management.
Is F&O trading risky?
Yes. F&O trading carries significant risk. Options buyers can lose their entire premium. Futures traders and option sellers can lose more than their initial margin. According to a SEBI study, approximately 89% of individual F&O traders in India made net losses over a three-year period.
How are F&O profits taxed in India?
F&O profits are taxed as non-speculative business income at your applicable slab rate. Losses can be set off against any income except salary and carried forward for 8 years. Tax audit is required if turnover exceeds Rs 10 crore.