Types of derivatives
| Type | What it is | Where it trades in India |
|---|---|---|
| Futures | An agreement to buy or sell at a set price on a future date | NSE, BSE, MCX |
| Options | The right, not the obligation, to buy (call) or sell (put) at a set price | NSE, BSE, MCX |
| Forwards | A private agreement like a future, not traded on an exchange | Between banks and companies |
| Swaps | An exchange of cash flows, such as fixed for floating interest | Mostly between institutions |
Exchange-traded futures and options have standard lot sizes, expiry dates and margins, and are settled through a clearing corporation, which removes the risk that the other side fails to pay.
Underlyings in India
- Equity: indices such as Nifty 50, Bank Nifty, FinNifty and Sensex, and over 200 stocks.
- Commodities: gold, silver, crude oil, natural gas, base metals and some agricultural goods on MCX and NCDEX. See commodity trading.
- Currency: rupee pairs such as USD-INR.
- Interest rates: government bond futures.
SEBI regulates exchange-traded derivatives, including commodity derivatives since 2015.
What derivatives are used for
| Use | Example |
|---|---|
| Hedging | A portfolio holder buys Nifty puts to limit losses in a fall |
| Speculation | A trader buys Nifty calls on a view that the market will rise |
| Arbitrage | A trader buys shares and sells futures when the futures trade above fair value |
| Income | An investor sells calls against shares held, a covered call |
Key features
- Lot size: derivatives trade in fixed quantities. See lot size.
- Expiry: every contract ends on a set date. See expiry.
- Margin: futures and sold options need margin; bought options need the premium. See margin.
- Settlement: index derivatives settle in cash; stock derivatives by delivery. See physical settlement.
- Leverage: a small amount of capital controls a large position. See leverage.
The risk
Derivatives can lose money quickly, and some positions, such as sold options and futures, can lose more than the initial margin. SEBI's study of individual traders found that 93% of them made losses in equity F&O over FY22 to FY24. See our summary of SEBI's F&O profitability studies.
Related terms
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Frequently asked questions
What are derivatives in simple words?
Contracts whose price depends on the price of something else, such as a share, an index or gold.
What is F&O?
Futures and options, the two main types of exchange-traded derivatives in India.
Are derivatives risky?
Yes. They are leveraged, and losses can be large. Hedged positions and strict risk rules reduce the risk but do not remove it.
Who can trade derivatives in India?
Anyone with a trading account that has the F&O segment activated. Brokers ask for income proof before activating it.