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Decoded: What is F&O and how is it different from equity trading?

Futures and Options are derivative contracts which allow a market participant to purchase and sell a stock or index at a specific price and on a future date. Let us find out more about them

Topics
F&O | Futures & Options | stock markets

Rex Cano 

Within the equity market, there is another segment which is called the derivatives market. Futures and Options (F&O) are the most common derivative contracts where two parties enter into a contract. It is speculative in nature and considered a safer option than the share market. Things you need to know about F&O

  • All contracts have an expiry date
  • Each contract represents an underlying stock/index in the spot market
  • The future price moves in tandem with the underlying asset
  • Contracts are traded in a fixed Lot Size, and multiples thereof
  • Index future contracts are available in monthly series, while index options are available on weekly and monthly expiry
  • Stock are available only up to 3-month future expiry dates, whereas one can trade in index contracts up to 5-year future expiry dates
Due to the strong element of speculation, the segment usually sees hedgers or speculators trading in it. The maximum duration for a futures contract is three months. The basic difference between Futures & Options
  • A future contract requires a buyer to purchase shares and a seller to sell shares on a specified future date
  • Option contract gives the buyer and seller the right, but not the obligation to sell or purchase
  • So, if needed, you can opt out of your options any given time
Now, let us understand the basic difference between A future contract requires a buyer to purchase shares and a seller to sell shares on a specified future date, unless the position is closed prior to contract expiry date. While an option contract gives the buyer and seller the right, but not the obligation, to buy and sell shares at a specific price any time till the contract is in effect. So, if needed, you can opt out of your options any given time. But that wouldn’t be possible in case of futures, where the trade must take place at the specified date. There are two types of Options: 1. Calls 2. Puts Options have two categories.

If you are bullish on a stock/ index and expect the price to rise in future, you can buy Calls or Sell. And if you are bearish on a stock/ index and expect the price to fall, you can chose Puts option Who trades in F&O 1. Institutional Investors -- both foreign & domestic 2. High Net Individuals (HNIs) 3. Hedge Funds 4. Arbitragers 5. Retail investors Although are said to be high-risk trading instruments given the higher capital requirement in terms of minimum quantity to trade, yet these are seen as a go to product by traders and speculators due to ample liquidity, mainly in the index contracts such as Nifty and Bank Nifty. The trading volume in the segment is considerably higher compared to the cash segment

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First Published: Fri, November 12 2021. 09:00 IST
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