More than one crore futures and options (F&0) traders lost 21.81 lakh crore in F&O during FY22-FY24, according to a Securities and Exchange Board of India (SEBI)

About Futures and Options Trading

• F&O are financial derivatives that derive their value from an underlying asset (such as stocks, indices, commodities, or currencies)
• They are contracts between two parties, where they agree to buy or sell the underlying asset at a predetermined price on a future date.

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What are Derivatives?

• According to SEBI, derivatives are financial contracts that allow investors to buy or sell an asset at a future date. 
• They are a leveraged form of trading, which means that investors can buy a large quantity of assets by paying a small amount.
• Common derivatives include futures contracts, forwards, options, and swaps. 
• Derivatives can be traded on an exchange or over the counter. 
• In India, SEBI regulates the derivative market. 
• Derivatives can be used for hedging or speculation.

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Types of Derivatives

• Futures Contract: Agreement to buy or sell the underlying asset at a future date for a predetermined price.
• Obligatory for both parties to fulfill the contract on the agreed-upon date.
  • They are subjected to high risk and can reap unlimited profit or loss.
  • Less flexible as it’s obligatory.
  • Underlying assets include physical commodities and financial instruments (stocks, currencies and bonds etc.)
• Options Contract: Provides the buyer with the right, not the obligation, to buy (call option) or sell (put option) the underlying asset at a predetermined price.
  • They carry limited risk and can reap either unlimited profit or loss.
  • More flexible as the buyer can choose not to execute.

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