What is the difference between options and futures?
The main fundamental difference between options and futures lies in the obligations they put on their buyers and sellers. An option gives the buyer the right, but not the obligation to buy (or sell) a certain asset at a specific price at any time during the life of the contract. A futures contract gives the buyer the obligation to purchase a specific asset, and the seller to sell and deliver that asset at a specific future date, unless the holder's position is closed prior to expiration.
[Futures may be great for index and commodities trading, but options are the preferred securities for equities. Investopedia's Options for Beginners Course provides a great introduction to options and how they can be used for hedging or speculation.]
Aside from commissions, an investor can enter into a futures contract with no upfront cost whereas buying an options position does require the payment of a premium. Compared to the absence of upfront costs of futures, the option premium can be seen as the fee paid for the privilege of not being obligated to buy the underlying in the event of an adverse shift in prices. The premium is the maximum that a purchaser of an option can lose.
Another key difference between options and futures is the size of the underlying position. Generally, the underlying position is much larger for futures contracts, and the obligation to buy or sell this certain amount at a given price makes futures more risky for the inexperienced investor.
The final major difference between these two financial instruments is the way the gains are received by the parties. The gain on a option can be realized in the following three ways: exercising the option when it is deep in the money, going to the market and taking the opposite position, or waiting until expiry and collecting the difference between the asset price and the strike price. In contrast, gains on futures positions are automatically 'marked to market' daily, meaning the change in the value of the positions is attributed to the futures accounts of the parties at the end of every trading day - but a futures contract holder can realize gains also by going to the market and taking the opposite position.
Let's look at an options and futures contract for gold. One options contract for gold on the Chicago Mercantile Exchange (CME) has the underlying asset as one COMEX gold futures contract, not gold itself. An investor looking to buy an option may purchase a call option for $2.60 per contract with a strike price of $1600 expiring in Feb 2018. The holder of this call has a bullish view on gold and has the right to assume the underlying gold futures position until the option expires after market close on Feb 22, 2018. If the price of gold rises above the strike price of $1600, the investor would exercise his right to obtain the futures contract, otherwise, he may let the options contract expire. The maximum loss of the call options holder is therefore, the $2.60 premium that he paid for the contract.
The investor may instead decide to obtain a futures contract on gold. One futures contract has its underlying asset as 100 troy ounces of gold. The buyer is obligated to accept 100 troy ounces of gold from the seller on the delivery date specified in the futures contract. If the trader has no interest in the physical commodity, he can sell the contract before delivery date or roll over to a new futures contract. If the price of gold goes up (or down), the amount of gain (or loss) is marked to market i. e. credited (or debited) in the investor's broker account at the end of each trading day. If the price of gold in the market falls below the contract price that the buyer agreed to, he is still obligated to pay the seller the higher contract price on delivery date.
To learn more about options see the tutorial Options Basics .
To learn more about futures see the tutorial Futures Fundamentals .

3 Easy Steps to trade in F&O (Equity Future Derivatives) at BSE, NSE, MCX.
Posted on Tuesday, December 30, 2014.
Modified on Saturday, October 1, 2016.
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'How to start F&O trading?' is the challenge most people faces when they enters in to stock market. In this article I will share the information about how to trade Equity Futures and Options in few easy steps.
Let's begin with few fundamental questions asked about F&O trading. Later I will talk about easy steps to trade in F&O.
Frequently Asked Questions about F&O Trading in India.
What is Derivative (Futures and Options) Trading?
Like share trading in the cash segment (buy & sell shares), derivative is another kind of trading instrument. They are special contracts whose value derives from an underlying security.
Futures and Options (F&O) are two types of derivatives available for the trading in India stock markets.
In futures trading, trader takes the buy/sell positions in an index (i. e. NIFTY) or a stock (i. e. Reliance) contract. If, during the course of the contract life, the price moves in traders favor (rises in case you have a buy position or falls in case you have a sell position), trader makes profit. In case the price movement is adverse, trader incurs losses.
Few fundamental things you should know about F&O trading:
The F&O segment accounts for most trading across stock exchanges in India. They are the most popular trading instruments worldwide. To take the buy/sell position on index/stock futures, trader has to place certain % of order value as margin. Which mean if a trader buy future contract worth of Rs 4 Lakhs, he pays just around 10% cash to broker (known as margin money) which is Rs 40,000. This gives opportunity to trade more with little cash. Profit or losses are calculated every day until trader sells the contract or it expires. Margin money is calculated every day. Which means if the trader doesn't have enough cash (margin money) in his account (on any day when trader is holding the position), he has to deposit the margin money to broker or broker can sell his F&O contract and recover the money. Unlike stocks; derivative has an expiry. Which means if trader do not sell until a pre-decided expiry date, the contract is expired and profit or loss is shared with you by the broker. Future Trading can be done on the indices (Nifty, Sensex etc). NIFTY Futures are among the most traded future contracts in India.
Why should I trade in F&O?
With futures trading, trader can leverage on trading limit by taking buy/sell positions much more than what you could have taken in cash segment. However, the risk profile of your transactions goes up. Settlements are done on daily basis (MTM) until the contract expires. Profits/losses are calculated (and credited/debited in traders account) on end of the day every day. Demat account is not needed for F&O trading. All futures transactions are cash settled. Contract positions are hold by the exchanges until they expire. The F&O positions are carrying forward to next day and can be continued till the expiry of the respective contract and squared off any time during the contract life. This is different from 'Margin Trading' where trader has to close the position the same day.
What are different types of Equity Futures & Options available in India?
In the Futures and Options segment at NSE and BSE; trading is available in mainly two types of contracts:
Index Futures & Options.
At NSE; Index F&O are available for 6 indices. This includes; CNX Nifty Index, CNX IT index, Bank Nifty Index and Nifty Midcap 50 index.
CNX Nifty Index (based on the Nifty index.) BANK Nifty Index (based on the BANK NIFTY index) CNXIT Index (based on the CNX IT index) Nifty Midcap 50 Index ( based on the Nifty Midcap 50 index) CNX Infrastructure Index (based on the CNX Infrastructure index) CNX PSE Index (based on the CNX PSE index)
Similar way BSE offers trading in future for underlying assets as following indexes:
Futures & Options on Individual Securities.
Stock exchanges offer F&O contracts for individual scripts (i. e. Reliance, TCS etc.); which are traded in the Capital Market segment of the Exchange.
NSE offers F&O trading in 135 securities stipulated by the SEBI. The stock exchange defines the characteristics of the futures contract such as the underlying security, market lot, and the maturity date of the contract.
Why all stocks are not available for F&O trading?
F&O contracts of individual companies are not available for all the companies listed in stock exchanges. Only those stocks, which meet the criteria on liquidity and volume, have been considered for futures trading. Or companies whose shares have high liquidity and volume of trades at stock exchanges are eligible for F&O trading.
Stock exchange decides which company's F&O contracts can be traded at the exchange.
What does 'Square off' means in future trading?
'Square off' means selling a future position.
For example; if you buy 1 lot of NIFTY future on 20th Aug 2014 and decide to sell it on 24th Aug 2014; you actually square off your future position.
Can I sell (or square off) the F&O Contract before expiry date?
Yes, you can sell the contract (or square off the open position) anytime before the expiry date. If you do not sell the contract by expiry date; the contract get expired and profit / loss is shared with you.
What does Cover Order' mean?
The order place to sell square off an open future position is called cover order.
What are different types are settlements for Futures?
Future contracts are settled in two ways:
Daily Mark to Market (MTM) Settlement.
The profits/losses are calculated on daily basis at the end of the day. MTM goes until the open position is closed (square off or sell). The next question and an example in the later part of this article will explain you MTM process in detail.
Final Settlement.
On the expiry of the futures contracts; the exchange marks all positions of a CM to the final settlement price and the resulting profit / loss is settled in cash.
What is Mark to Market (MTM) in Future Trading?
Note: MTM is the most important process in F&O trading and very little difficult to understand for conventional stock market investors who buy and sell shares for long term.
At the end of every trading day; the open future contracts are automatically 'marked to market' to the daily settlement price. This means; the profits or losses are calculated based on the difference between the previous day and the current day's settlement price.
In other words; MTM means every day the settlement of open futures position takes place at the closing price of the day. The base price of today is compared with the closing price of previous day and difference is cash settled.
i. e. For 1 lot of NIFTY Futures (50 shares) if.
Previous Day Last Price (Brought Forward Price) = Rs 7629.55 Today Last Price (Carry Forward Price) = Rs 7678.00.
Net Profit = (7678.00-7629.55)*50 = Rs 2422.50.
After the profit/loss calculated; the future position is Carry Forward to next day. The same process of MTM repeats and profit/losses are calculated again every day until the position is squared off or it expires. Every day is like a fresh position until contract is sold or expires. Through the profit/loss are credited/debited on daily basis in traders account; the brokerages / fees / taxes are only charged at the time of buying and selling future contract. MTM is a very important concept and very important to understand for future stock traders. End of Day EOD MTM is mandatory for future contracts. The sample F&O Day Bills for couple of days to understand this concept.
Why different contracts are available for same index or stock? Explain the F&O Trading Cycle? What is F&O Contract life?
Equity futures & options are traded in 3 'trading cycles'. The 3 month trading cycle includes the near month (one), the next month (two) and the far month (three).
i. e. If current month is Aug 2014; the contracts available for NIFTY Futures are as below:
The contract life of the F&O contract is until the last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day is the previous trading day.
For example; in the above table; 28th Aug 2014 is the expiry of this month's contract. The contract life of this future contract is from today to 28th Aug 2014.
New contracts are introduced on the trading day following the expiry of the near month contracts. The new contracts are introduced for three month duration. This way, at any point in time, there will be 3 contracts available for trading in the market (for each security) i. e., one near month, one mid month and one far month duration respectively.
What is 'Expiry day' for F&O contract?
Futures contracts expire on the last Thursday of the expiry month. If the last Thursday is a trading holiday, the contracts expire on the previous trading day.
What is 'Margin' amount in future trading?
To start trading in futures contract, you are required to place a certain percentage of the total contract as margin money.
Margin is also known as a minimum down-payment or collateral for trading in future. The margin amount usually varies between 5 to 15% and usually decided by the exchange.
Note: This feature (only paying small margin money) makes F&O trading most attractive because of high leverage. You can make a larger profit (or loss) with a comparatively very small amount of capital using F&O trading.
Margin % differs from stock to stock based on the risk involved in the stock, which depends upon the liquidity and volatility of the respective share besides the general market conditions.
Normally index futures have less margin than the stock futures due to comparatively less volatile in nature.
[Important Note] The margin amount usually recalculated daily and may change during the life of the contract. It depends on the volatility in the market, script price and volume of trade. It is possible that when bought the future position; the margin was 10%; but later on due to the increased volatility in the prices, the margin percentage is increased to 15%.
In that scenario, trader will have to allocate additional funds to continue with open position. Otherwise broker can sell (square off) the future contract because of insufficient margin. Thus It is advisable to keep higher allocation to safeguard the open position from such events.
How is futures trading different from margin trading?
While buy/sell transactions in margin segment have to be squared off on the same day, buy/sell position in the futures segment can be continued till the expiry of the respective contract and squared off any time during the contract life.
Margin positions can even be converted to delivery if you have the requisite trading limits in case of buy positions and required number of shares in your demat in case of sell position. There is no such facility available in case of futures position, since all futures transactions are cash settled as per the current regulations. If you wish to convert your future positions into delivery position, you will have to first square off your transaction in future market and then take cash position in cash market.
Another important difference is the availability of even index contracts in futures trading. You can even buy/sell indices like NIFTY in case of futures in NSE, whereas in case of margin, you can take positions only in stocks.
Trade in Equity Futures in 3 Easy Steps:
Below example demonstrate how to buy and sell one lot of NIFTY Future.
Step 1: Buy Equity Future.
Assuming that you have an account with a share broker in India to trade in F&O segment; the first step is to buy (or sell in case of short-selling futures) a future contract. You can visit NSE or BSE websites to check the available future contracts for indexes as well as securities.
In this example; we will buy 1 lot of NIFTY ( 50 shares). Note that you can buy/sell the F&O contracts only in lots. The lot size is different from contract to contract.
Placing a buy order is pretty simple and similar to buying shares for delivery.
Below screenshot shows that we are placing an order to by 1 lot (50 shares) of NIFTY Futures at the price of Rs 7643.90.
In above 'buy order entry' form some of the important fields are:
Exchange segment = NFO (NSE F&O segment) Inst Name (Instrument Name) = FUTIDX (Future Index) Symbol = NIFTY Expiry = 25Sep2014.
Step 2: Hold Equity Future.
You hold the equity future contract until you sell it or it expires on predefined expiry day (in our case its 25th Sept 2014). In this example we will hold the F&O contract for 7 days and then sell it.
For each day we hold the contract, the broker send a 'Future & Options Day Bill' along with few other statements including margin statement, client ledger detail, contract note etc.
The F&O day bill provides the accounting information of the contract on daily basis. Let's go through the F&O day bills for each day and discuss the accounting:
Buy Price (NIFTY): 7643.90 Close Price (NIFTY): 7629.55.
Below is the Future & Options Day Bill for end of day 1, the day when we bought the contract. Let's check few useful fields in this.
Brokerage: The Rs 20 (as I placed this order though Zerodha, The flat fee discount broker) is debited by the broker as brokerage charge. Brokerage is charged on the day when we buy the F&O contract and the day when we sell it. Regular Trade: This is used for buy & sell transaction. It show which F&O script you bought, its expiry date, quantity, Rate at which you bought it and total amount (Rs 3,82,195).
Note: Though total debit amount is Rs 3.82 Lakhs; it doesn't mean you have to pay this much amount. It's just for accounting. You pay only margin amount to the broker for this trade, which is around 10% of total amount (i. e. Rs 38,219). Carry Forward: As we decided to hold the position for next few days; our F&O contract will be carry forward. The 'Carry Forward' value of the contract is decided by the exchange at the end of the trading day. In our case it's Rs 7629.55 (NIFTY actually fall on day 1). Based on this rate; the total credit to our account is Rs 381477.50. Net (Profit / Loss): Day 1 accounting shows the loss of Rs 717.50. Various taxes and charges (applicable on buy transaction) are added to our losses and net due to us is now Rs 787.97. This is the amount broker will take from our account by end of the day.
Contract Note - Buy NIFTY F&O.
For buy and sell transactions of F&O contract, broker send a contract note. Below is the contract note received from broker on Day 1. The next contract note will be send to you on the day you sell the contract.
Client Account Ledger Details:
Brokers also share the ledger detail with the client with a 'client account ledger detail' document. This document provides you detail about all the financial transaction done by broker on day 1.
Day 2 (Market Close on Saturday):
On day 1 I decided to carry forward the F&O position. But on day 2 the market is closed as its Saturday. Note that the position is now name as 'Brought Forward'.
Brought Forward: The F&O position which is brought forward from previous day. Brought Forward Price (NIFTY): 7629.55 Close Price (NIFTY): NA.
Note: The above day bill doesn't have any 'Carry Forward' position as the market was closed.
Day 3 (Market Close on Sunday):
Brought Forward Price (NIFTY): 7629.55 Close Price (NIFTY): NA.
Brought Forward Price (NIFTY): Rs 7629.55 Close Price (NIFTY): Rs 7678.00.
This is the first trading day (Monday) for NIFTY future and it went up around 50 points. Now let's check the accounting for Day 4:
Brought Forward: The contract values from last day. It's similar to the 'Carry Forward' row in last trading day's day bill. Carry Forward: On day forward we decided to carry forward the F&O contract (or decided not to sell it). NIFTY futures went up and NIFTY Sept Contract, which we are holding went up Rs 48.45 (closed at Rs 7678.00). This way end of the day the amount credited to our account is Rs Rs 3,83,900 and we made profit of Rs 2422.
The net profit of Rs 2422 is credited to the account.
Brought Forward Price (NIFTY): Rs 7678.00 Close Price (NIFTY): Rs 7781.70.
Similar to previous day, we decided to carry forward the future contract. The price went up by Rs 103.7 and we made decent profit of Rs 5185.00.
Brought Forward Price (NIFTY): Rs 7781.70 Close Price (NIFTY): Rs 7779.55.
Once again we decided to carry forward the contract. The price remain flat and actually went down by Rs 2.15, loss of Rs 107.50.
Step 3: Sell Equity Future.
On day 7 I decided to sell the contract for Rs 7800.00. Here is my transaction:
Brought Forward Price (NIFTY): Rs 7779.55 Sell Price (NIFTY): Rs 7800.00.
Below is the Future & Options Day Bill from day 7, the day when we sold the contract. Let's check it:
Brokerage: The Rs 20 is charged by the broker as brokerage charge. This is similar to how we paid brokerage on day 1 when we buy the F&O Contract. Regular Trade: The sell transaction is captured here. Net (Profit / Loss): Day 7 accounting shows the profit of Rs 1022.50. After deducting taxes and brokerage; we made net profit of Rs 947.15. This is the amount broker will pay us on Day 7.
Summary of Gross Profit / Loss:
Brokerage Paid:
Choosing Right Broker for F&O Trading.
It's very important to choose the right broker to trade F&O for multiple reasons including; easy transactions, free software, low brokerage and low transaction changers. We recommend ProStocks .
ProStocks, F&O Trading Account.
ProStocks, an online stock broker based in Mumbai is among the popular broker. They provide low cost stock and currency derivatives trading at BSE and NSE.
UpStox has 2 pricing plans:
Unlimited Trading Plan - Rs 899 per month for unlimited Equity and Equity F&O trading in an exchange Or Rs 499 per month for unlimited Currency F&O Trading. Flat Rate Trading - Rs 15 per trade in any exchange, any segment or any size trade (irrespective to the number of lots in it).
Tips for a beginner in F&O trading.
F&O trading is about predicting the future, which is not an easy in any way, shape, or form. F&O trading is very high risk financial instrument. More risk you take while F&O trading, more rewards you will get. At the same time, the losses are also hug The concept of margin money (or only paying small money upfront for large positions) makes F&O trading most attractive. You can make a larger profit (or loss) with a comparatively very small amount of capital using F&O trading. If enough margin money is not available in your account with the broker; most brokers closes the position automatically without informing you. Especially at the time of sudden falls in stock markets, short of margin may cause huge losses.
User Comment.
I would like to know through the accounting entries how i can make monety selling futures.
Please illustrate with accounting entries. Thank you.
How much Bank/account balance one should have at time of placing buy or sell order in future.
Thanx for explaining the future trading in such a simple but effective methods. The examples given has cleared all doubts. Will be kind enough to cover option trading (Put and call options), implications and meaning of terms like open interest. Inference on increase/ decrease of open position, put call ratios(PCR) etc.
Ashok kumar Dhabai.
Net profit is 7700.19 rs after removing all brokerage and transaction charges . How did u get 7659.18 rs ? where did the remaining 41.01 rs money is lost?
so how much you paid here.
is it only 7643.90 or.
2. suppose you brought for 38219 and you sold on the same day where nifty fell 100 points. So how much you loose.
i. e. starting from Monday to saturday (with fresh example).
Kindly give 3 different examples, with different Price, Up/down rate, etc.
What is the SAFE Margin money to keep with Broker?
Please explain ''SPAN Margin'' and ''Exposure Margin'' in ''Client Account Ledger Details'' at DAY1.
Suppose during market hours 1.30 pm if we want to sell our position than at that time the price was 7800 so we sold it at 7800. You can buy or sell your positions at any time during the market hours.
Hope this cleara your doubt.
Keep minting money.
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Futures.
What are 'Futures'
Futures are financial contracts obligating the buyer to purchase an asset or the seller to sell an asset, such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash.
BREAKING DOWN 'Futures'
The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his contract. In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low as the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good. For example, if you were long in a futures contract, you could go short in the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets closes a trade.
Futures Speculation.
Futures contracts are used to manage potential movements in the prices of the underlying assets. If market participants anticipate an increase in the price of an underlying asset in the future, they could potentially gain by purchasing the asset in a futures contract and selling it later at a higher price on the spot market or profiting from the favorable price difference through cash settlement. However, they could also lose if an asset's price is eventually lower than the purchase price specified in the futures contract. Conversely, if the price of an underlying asset is expected to fall, some may sell the asset in a futures contract and buy it back later at a lower price on the spot.
Futures Hedging.
The purpose of hedging is not to gain from favorable price movements but prevent losses from potentially unfavorable price changes and in the process, maintain a predetermined financial result as permitted under the current market price. To hedge, someone is in the business of actually using or producing the underlying asset in a futures contract. When there is a gain from the futures contract, there is always a loss from the spot market, or vice versa. With such a gain and loss offsetting each other, the hedging effectively locks in the acceptable, current market price.

Future and options trading means

F utures and options represent two of the most common form of "Derivatives". Derivatives are financial instruments that derive their value from an 'underlying'. The underlying can be a stock issued by a company, a currency, Gold etc., The derivative instrument can be traded independently of the underlying asset.
Buyer Seller Price Expiry.
Some of the most popular assets on which futures contracts are available are equity stocks, indices, commodities and currency.