Future and Options (F&O) – Meaning, Uses, and Types

Last Updated: 1 Sep 2025

You will often hear the word F&O in the stock market. What is F&O trading exactly? F&O stands for Futures and Options. Futures and Options represent Derivatives of the stock market. These Derivatives are the financial instruments deriving their values from an underlying such as currency, gold, or the stocks of a company. You could earn a profit by trading these derivatives independently of the underlying assets.

Before going into the details of what is F&O in share market, let us first understand what Derivatives are and their types.

What are Derivatives?

It is a contract between two parties with a value based on agreed-upon underlying financial assets, like a security or a set of assets like an index. The underlying instruments of derivatives are generally bonds, currencies, commodities, interest rates, market indexes and stocks.
What is F&O in stock market? They are popular derivatives.

Types of Derivatives:

Derivatives are primarily of two types, namely Exchange-traded and Over the counter.

• Exchange-Traded: This kind of derivative is traded through organized exchanges around the world, where it can be bought and sold just like stocks. The most popular Exchange Traded Derivatives are Futures and Options. We are going into the details of Futures and Options in the following sections.
• Over the Counter: These derivatives are not traded through Exchanges and are not standardized, having varied features. Some over-the-counter (OTC) derivatives are forwards, swaps, swaption, etc.

What are Futures?

A future is a contract to buy or sell an underlying asset at a specific price on a set date in the future. Buying a futures contract means you agree to pay the price of the asset at the agreed time. Selling a futures contract means you agree to transfer the asset to the buyer at the agreed price on the specified date.

The underlying assets in a futures contract can include equity stocks, indices, commodities and currencies.

There is often a difference between the price of the asset in the futures market and the spot market (where assets are transferred immediately). This difference is called the basis. It is usually negative because of expenses such as interest, storage costs and insurance premiums. When the basis remains negative, the situation is called contango. A negative basis can sometimes indicate that the futures position may be more profitable.

Your profit or loss from a futures contract depends on the basis. Sometimes, holding an asset physically is more profitable than holding a futures position, for example, when you receive dividends from the asset. This can make the basis positive. A positive basis is called backwardation and usually occurs when the price of the asset is expected to fall.

When the futures contract reaches its maturity date, the futures price usually becomes almost equal to the spot price, so the basis tends to move towards zero.

What are Options?

Options are agreements that give you the right to buy or sell something at a fixed price within a set time. The fixed price is called the strike price. The date when the agreement ends is called the expiry date.

You pay a small amount of money, called a premium, to get this right. If the market price does not move in your favour, you can choose not to use the option. In that case, you only lose the premium you paid.

People use options for two main reasons. One is to protect themselves from big changes in price, which is called hedging. The other is to try and make money by guessing how prices will change, which is called speculation.

Options are flexible and can help in both rising and falling markets. But they still have risks, and their value can change quickly.

Types of Futures

There are several types of futures, each catering to different underlying assets:

1. Commodity Futures: This includes physical goods like agricultural products (wheat, corn), metals (gold, silver), and energy products (crude oil, natural gas). They help the producers and the consumers hedge against price fluctuations.
2. Stock Futures: These are individual company stock contracts where one can trade for the changes in stock prices or hedge positions.
3. Index Futures: This will track any market index, such as the Nifty 50 or S&P 50,0 where one will be able to get market exposure without holding individual stocks.
4. Currency Futures: These contracts can be used for trading against currency exchange rates to mitigate foreign exchange risk.
5. Interest Rate Futures: These are agreements to buy or sell debt instruments, such as government bonds, at a specified interest rate, used primarily for hedging against interest rate changes.

Types of Options

The two primary types of options are:

1. Call Options: Somebody buying a call option has the right to purchase the underlying asset at a pre-determined strike price and expiry date. This is the approach that investors usually take when they buy call options, thinking that the price of an asset will go up, so that as a result, there will be a difference between the market price and the strike price.
2. Put Options: The buyer of a put option can sell the underlying asset at a stated strike price up until expiration. Put options are usually purchased by investors who believe the price of an asset is set to fall. That will enable them to sell that put option for more than its market value and pocket the money.

Difference between Futures and Options

Point of Difference	Futures	Options
Meaning	A contract to buy or sell something at a set price on a fixed date in the future.	A contract that gives the right, but not the obligation, to buy or sell something at a set price within a set time.
Obligation	Both buyer and seller must complete the deal on the set date.	The buyer can choose whether or not to complete the deal. The seller must complete it if the buyer decides to go ahead.
Upfront Cost	No premium is paid, but margin money is needed.	Buyer pays a premium to get the right to trade.
Risk	High risk for both buyer and seller because the deal must happen.	Risk for the buyer is limited to the premium paid, but the seller’s risk can be high.
Use	Commonly used for hedging and speculation.	Used for hedging, speculation, and gaining flexibility in trades.
Profit or Loss	Profit or loss is unlimited for both sides.	Buyer’s loss is limited to the premium, but profit can be large.
Expiry	Must be settled on the set date.	Can be exercised any time before or on the expiry date, depending on the contract type.

Who Should Invest in Futures and Options?

Futures and options are not suitable for everyone. They work best for people who understand how these markets operate and are comfortable with the risks involved.

They may be suitable for:

• Experienced traders who can study market trends and make quick decisions.
• Investors looking to hedge their portfolio against price changes in shares, commodities, or currencies.
• People with high risk tolerance who can handle the possibility of losing money.
• Professionals or active market participants who have the time to track prices closely.

They may not be suitable for:

• Beginners with little knowledge of trading.
• People who cannot afford to take big losses.
• Investors who prefer stable and long-term investments.

Before investing, it is important to learn the basics, practise with small amounts, and understand that futures and options can lead to both big profits and big losses.

Conclusion

The Futures and Options are widely practiced Exchange Traded Derivatives, which help people earn by buying or selling underlying assets, whose evaluation is also termed as Open Interest.

Frequently Asked Questions

What are examples of F&O?

Examples of F&O include commodity futures like crude oil and gold, and stock index futures like Nifty 50. Options can be for an individual stock. The investor can buy call options in expectation of some price upswing or put options in expectation of a decline.

Is F&O trading profitable?

F&O trading is highly profitable yet risky. It is somewhat easy for good traders to earn money from the price movements of the underlying instrument. But with the ups and downs of the market, loss can happen quite quickly. It is advisable to have a proper strategy and proper risk management measures.

Which is better: futures or options?

It all depends on the personal trading objectives and risk willingness. In F&O, the futures contracts mandate traders to purchase or sell an asset at a predetermined price, whereas options offer the right but not the obligation. Options tend to be more flexible, whereas futures can generate larger potential returns.

How much money do you need to trade futures?

In F&O, the initial margin to trade a futures contract typically varies with the contract and broker but is between ₹5,000 to ₹20,000 per contract in India. This is the deposit against potential losses. Additional amounts may be required for optimal position sizing and risk management.

How risky is F&O trading?

F&O trading is inherently risky. The power of leverage increases the potential for both gain and loss. Due to its market volatility, price swings will be wide enough.