3 Easy steps to trade in F&O (Equity Future Derivatives)

Published on Tuesday, December 30, 2014 by Chittorgarh.com Team | Modified on Friday, March 20, 2020

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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

  1. 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, a 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 the opportunity to trade more with little cash.
    • Profit or losses are calculated every day until the 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 futures contracts in India.
  2. 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.
  3. 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:

    1. 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:

      • SENSEX
      • BSE100
      • BSETECK
      • BANKEX
    2. 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.

  4. 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.

  5. 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.

  6. 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.

  7. What does Cover Order' mean?

    The order place to sell square off an open future position is called cover order.

  8. What are different types are settlements for Futures?

    Future contracts are settled in two ways:

    1. 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.

    2. 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.

  9. 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 the 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

    Note:

    • 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.
  10. 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:

    Buy Order Entry - NSE Future (NIFTY)

    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.

  11. 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.

  12. 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.

    [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, the 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.

  13. 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.

Buy Order Entry - NSE Future (NIFTY)

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:

Day 1:

  • 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 shows 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.
Day Bill - NSE F&O Trading [Day 1]

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.

Contract Note Buy Order - NSE Future (NIFTY)

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.

Client Account Ledger Detail - NSE Future (NIFTY)

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
Day Bill - NSE F&O Trading [Day 2]

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
Day Bill - NSE F&O Trading [Day 3]

Day 4

  • 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 3,83,900 and we made profit of Rs 2422.

The net profit of Rs 2422 is credited to the account.

Day Bill - NSE F&O Trading [Day 4]

Day 5

  • 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.

Day Bill - NSE F&O Trading [Day 5]

Day 6

  • 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.

Day Bill - NSE F&O Trading [Day 6]

Step 3: Sell Equity Future

On day 7 I decided to sell the contract for Rs 7800.00. Here is my transaction:

Sell Order Entry - NSE Future (NIFTY)

Day 7

  • 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.
Day Bill - NSE F&O Trading [Day 7]

Summary of Gross Profit / Loss

Day Net Profit / Loss (in Rs )
Day 1 -787.97
Day 2 0
Day 3 0
Day 4 +2422.50
Day 5 +5185.00
Day 6 -107.50
Day 7 +947.15
Total Profit / Loss +7659.18

Brokerage Paid

Day Brokerage Paid
Day 1 (Buy) Rs 20
Day 7 (Sell) Rs 20

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 Logo

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).

Key features:

  • Demat account is optional for F&O traders
  • Free trading & demat account
  • Zero AMC Demat Account with Rs 1000 one time deposit.
  • Lowest Transaction Charges, Guaranteed.
  • Low call&trade charges - Rs 10 per executed order.
  • Free Trading Terminal, Website and Mobile app.
  • Excellent charts and real time data.

Tips for a beginner in F&O trading

  • F&O trading is about predicting the future, which is not 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 huge
  • 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.


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83 Comments

Sanjeev
33. Sanjeev  Sep 22, 2016 19:41 I Like It. | Report Abuse Reply 0
Beautifully explained. Cleared many doubts in my first reading only. 👍
Nishi Goel
32. Nishi Goel  Jun 15, 2016 20:32 I Like It. | Report Abuse Reply 0
thanks for your wounderful article on F&O.
Please explain ''SPAN Margin'' and ''Exposure Margin'' in ''Client Account Ledger Details'' at DAY1.
Bhavik
31. Bhavik  Jun 11, 2016 13:31 I Like It. | Report Abuse Reply 0
Very well explained. I just have one doubt. In the illustration, on day 7, when the contract was sold at 7800.0, it meant that the NIFTY had 7800.0 value in the market that day. correct? Or is it possible to sell the contract with next month''s price?
Xyz
31.1. Xyz  Aug 11, 2016 01:03 I Like It. | Report Abuse 0
No it doesnt mean that closing price was 7800.
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.
Happy trading ;)
Keep minting money.
Suresh
30. Suresh  May 15, 2016 13:14 I Like It. | Report Abuse Reply 0
Excellent. Very lucid. Best Wishes.
AKSSN
29. AKSSN  May 1, 2016 11:13 I Like It. | Report Abuse Reply 0
Beautifully explained. Very Good.
Venkat.Sivamani
28. Venkat.Sivamani  Apr 28, 2016 02:15 I Like It. | Report Abuse Reply 0
Very well explained on Futures
Maruthi
27. Maruthi  Apr 15, 2016 09:39 I Like It. | Report Abuse Reply 0
Excellent. Pl provide similar article on SME ipo and secondary market on SME scripts
Vishal
26. Vishal  Apr 13, 2016 00:09 I Like It. | Report Abuse Reply 0
It''s a very useful for new investor''s in share market
RAJKUMAR S D
25. RAJKUMAR S D  Apr 10, 2016 13:34 I Like It. | Report Abuse Reply 0
Excellent explanation in neat and clean words with simple example to grasp easily.

Thanks
Jossy
24. Jossy  Mar 31, 2016 17:01 I Like It. | Report Abuse Reply 0
Was very useful
U.SRINIVASAN
23. U.SRINIVASAN  Mar 29, 2016 21:22 I Like It. | Report Abuse Reply 0
tks. very nice explanation ........ useful for us...............
BNRAO
22. BNRAO  Mar 24, 2016 14:15 I Like It. | Report Abuse Reply 0
Very nice explanation. and explained in simple terms
nilutpal Choudhury
21. nilutpal Choudhury  Mar 15, 2016 00:21 I Like It. | Report Abuse Reply 0
Really great explanation......have no words to thank......
Jayanta
20. Jayanta  Mar 9, 2016 16:36 I Like It. | Report Abuse Reply 0
Very nice explanation.
Rajeev
19. Rajeev  Mar 6, 2016 17:38 I Like It. | Report Abuse Reply 0
Excellent explanation. Looking forward for an article in option segment also.
dip. sawarkar
18. dip. sawarkar  Feb 26, 2016 16:24 I Like It. | Report Abuse Reply 0
i had never know about f&o even i m working with sub-broker but as of now i know very well and got something is like very new concept thanx zeroda
Maruthi
17. Maruthi  Feb 23, 2016 08:18 I Like It. | Report Abuse Reply 0
very illustrative. thanks
Tirthankar maiti
16. Tirthankar maiti  Feb 8, 2016 23:13 I Like It. | Report Abuse Reply 0
beginners must know it, sir....simply splendid
saily shinde
15. saily shinde  Feb 6, 2016 16:42 I Like It. | Report Abuse Reply 0
Very nice information
Sravan Kumar
14. Sravan Kumar  Feb 5, 2016 18:13 I Like It. | Report Abuse Reply 0
Very impressive sir. Step by step explanation is very useful for F&O beginners like me. Thank you and if please send me an email consisting how strike price works in options segment.
Arun Mankane
13. Arun Mankane  Jan 10, 2016 12:03 I Like It. | Report Abuse Reply 0
Cover all Key point which''s information must be req for 1st time doing trade in Market

Thanks Lot Sir
NITIN
12. NITIN  Jan 6, 2016 00:45 I Like It. | Report Abuse Reply 0
EXCELLENT...............VERY INFORMATIVE
CLEARED ALL THE DOUBTS.....THANKS A LOT.
Shyama
11. Shyama  Jan 3, 2016 18:10 I Like It. | Report Abuse Reply 0
Excellent explanation for Beginners to professional.Please post a article about Option trading as same as Future trading explained here
srividya
10. srividya  Dec 30, 2015 16:45 I Like It. | Report Abuse Reply 0
is brokerage levied on the future not covered on expiry.
ABDULKARIM
9. ABDULKARIM  Dec 27, 2015 09:35 I Like It. | Report Abuse Reply 0
WELL UNDERSTAND. GOOD EXPLAIN. THANKS LOT.
Agrim Kaushal
8. Agrim Kaushal  Dec 26, 2015 12:18 I Like It. | Report Abuse Reply 0
extremely lucid and simple article bringing out the nuances of F&O trading very well
vijay Makwana
7. vijay Makwana  Dec 10, 2015 16:10 I Like It. | Report Abuse Reply 0
Thanx for educating, very nicely explained.
TS
6. TS  Sep 30, 2015 19:06 I Like It. | Report Abuse Reply 0
Moral: Sometimes articles are also understandable than videos.

Just Keep it up.
sebastian fernandes
5. sebastian fernandes  Aug 31, 2015 19:36 I Like It. | Report Abuse Reply 0
excellent article. Though i am going through an offline class this article helped me to understand more about futures and margin trading and the step by step method is exemplory. keep the good work in other segments also.
Ashok
4. Ashok  Jul 31, 2015 12:53 I Like It. | Report Abuse Reply 0
Excellent & highly informative article by Chittorgarh.com Team

Kindly do share such articles to create proper awareness of the indian stock markets

thank you
Bhushan
3. Bhushan  Jul 6, 2015 22:30 I Like It. | Report Abuse Reply 0
Excellent explanation!
You can even suggest accounting and book keeping and income tax related expenses applicable incase of future trades.
This will then be more clear for newbie to understand should he start with Futures.
Vismadev
2. Vismadev  Jun 19, 2015 22:01 I Like It. | Report Abuse Reply 0
Excellent article on future. Can you please explain option trading also, like you explain future trading in this article with pictures?
KUMARASWAMY.S
1. KUMARASWAMY.S  Jun 19, 2015 20:59 I Like It. | Report Abuse Reply 0
EXCELLENT STEP BY STEP EXPLANATION OF f&q CALCULATION CLEAR
ALL DOUBTS.PRESENT NIFTY LOT IS 25. PL UPDATE DATA.








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