F&O Trading for Beginners: Futures vs Options Explained

Derivatives (F&O) were created for hedging, but in India, they are used for speculation. If you are stepping into this arena, know your weapons.

Futures: The Plain Vanilla

A Future is a contract to buy/sell a stock at a specific price on a future date.
Key Feature: Linear Profit/Loss.
If Reliance moves up ?1, your Reliance Future moves up ?1 (multiplied by Lot Size).
Risk: Unlimited. If the stock crashes 20%, you lose 20% of the contract value, which could be more than your capital.

Options: The Complex Beast

An Option gives you the right but not the obligation to buy/sell.
Key Feature: Non-Linear. Price depends on Greeks (Time, Volatility).
Risk (for Buyers): Limited to Premium paid.
Risk (for Sellers): Unlimited.

The Lot Size Trap

You cannot buy 1 share. You buy a "Lot."
Nifty Lot = 50. Reliance Lot = 250.
This creates leverage. With ?1 Lakh margin, you control ?6 Lakhs worth of Reliance shares. Leverage cuts both ways.