Upon your journey of exploring the Indian stock market, you will quickly start seeing all sorts of confusing terms. For example, one of the first ones you will likely hear about is futures and options. You may come across these terms on the news, during trading discussions, and even in platform features-so it is understandable if you feel uncertain or confused when you first see them. As a new investor in the market, you must have clarity before engaging with these instruments. 

This article will provide a clear definition, structure, and understanding of futures and options, so there is no ambiguity or confusion regarding their functions and roles in the wider marketplace. The purpose of this article is to help new market participants develop a basic understanding of these concepts at their own pace. 

What futures and options mean in the stock market 

Derivatives, such as Futures and Options, derive their values from assets. Futures and Options are contracts linked to another type of Asset. The underlying assets can be stocks, indices, etc., that are correlated to the market. The key difference between trading futures and options versus trading equities is that when you trade futures and options, you are not trading the underlying asset, but rather you are trading a contract linked to the asset.  

Understanding this distinction will provide you with insight into your exposure to these contracts and the obligations associated with them, as well as how the settlement of these contracts works compared to traditional stock trading. You must first understand how futures and options differ from one another to correctly identify what the activity associated with them is trying to tell you. 

Why futures and options exist 

Futures and options serve as tools for managing risk, allowing those who use them to manage potential large price fluctuations. Users of these instruments may base their business decisions on what they think might happen in the future, rather than react to actual events for that day. 

If you are just beginning your experience with futures and options, you should learn that futures and options also have a non-trading purpose, including protecting pricing and managing risk. 

Today, futures and options play a significant role in the capital market in India. 

Understanding futures contracts 

What is a futures contract 

A futures contract is an agreement to buy or sell an underlying asset at a predetermined price on a specified future date. 

When you enter a futures contract, both parties carry an obligation. The buyer agrees to buy, and the seller agrees to sell, at the agreed price on expiry. 

For you, this means commitment matters. A futures contract is not optional once entered. 

How futures contracts work in practice 

Futures contracts trade on exchanges in standardised formats. Each contract has a fixed lot size, expiry date, and underlying asset. 

You do not pay the full contract value upfront. Instead, you provide a margin amount. This margin acts as a security deposit. 

Prices move daily, and gains or losses are reflected in your account through a process called mark-to-market. Understanding this daily adjustment helps you track changes clearly. 

Understanding options contracts 

What is an options contract 

An options contract gives you a right, not an obligation, to buy or sell an underlying asset at a specific price within a defined period. 

If you choose to exercise this right, you act on the contract. If not, the contract expires. 

For you, this difference between right and obligation is central to understanding options. 

Call options and Put options 

A call option gives you the right to buy the underlying asset. A put option gives you the right to sell the underlying asset. 

You pay a premium to acquire this right. This premium is the maximum amount you pay to hold the option. 

Knowing whether you are dealing with a call or a put helps you interpret market behaviour more accurately. 

Key differences between futures and options 

Futures and options may appear similar, but their structure differs. 

In futures, both parties have obligations. In options, only the seller has an obligation if the buyer exercises the right. 

In futures, margins adjust daily. In options, buyers pay a fixed premium upfront. 

For you, these differences affect how exposure, risk, and cash flow behave over time. 

Margin and premium explained simply 

When you trade futures, you place a margin. This margin changes as prices move. 

When you deal with options as a buyer, you pay a premium. This premium does not change after purchase. 

Understanding this distinction helps you read account statements and platform alerts without confusion. 

How expiry works in futures and options 

Both futures and options have expiry dates. On expiry, contracts either settle or lapse. 

In futures, contracts settle based on the final price. In options, contracts expire worthless if the right is not exercised. 

For you, expiry dates act as checkpoints. They define the life of a contract and influence how positions behave as expiry approaches. 

Why futures and options require careful understanding 

Futures and options introduce leverage. Leverage increases exposure relative to capital deployed. 

This structure makes understanding essential. Market movement impacts positions faster than in cash trading. 

For you, focusing on process and mechanics matters more than reacting to price changes. 

Eligibility and access to futures and options 

To participate in futures and options, you need specific permissions and account setup. 

You must open a demat account online and activate trading features that support derivatives. Platforms usually require additional declarations to confirm understanding of risks. 

This process ensures that access aligns with regulatory requirements. 

How does opening a demat account online support derivatives trading 

When you open a demat account online, you create the base structure for market participation. 

Your demat account holds securities, while your trading account executes orders. For futures and options, your demat account plays a role in margin and settlement processes. 

Opening the account online simplifies access while maintaining compliance. 

Understanding lot size and contract value 

Futures and options trade in lots, not individual units. Each lot represents a fixed quantity of the underlying asset. 

Contract value equals price multiplied by lot size. Margin requirements depend on this value. 

For you, lot size determines exposure scale. Understanding it helps you read contract specifications correctly. 

How daily settlement affects your position 

In futures trading, daily settlement adjusts gains and losses each trading day. 

This means your available balance changes even if you do not exit the position. 

For you, tracking daily settlement avoids surprises and improves awareness of position health. 

Futures and options versus equity trading 

Equity trading involves ownership of shares. Futures and options involve contracts linked to shares or indices. 

Ownership rules differ. Settlement processes differ. Risk profiles differ. 

For you, understanding these distinctions helps you treat each segment appropriately rather than grouping them together. 

Common misconceptions among new participants 

Many new participants assume that futures and options predict market direction. They do not. They only reflect price relationships. 

Another misconception is that futures and options behave independently of cash markets. In reality, they remain closely linked. 

Clearing these misconceptions helps you approach learning with balance. 

Learning futures and options gradually 

You do not need to understand everything at once. Learning happens step by step. 

You begin by understanding contract structure, then margin, then settlement. Over time, patterns become clearer. 

For you, patience supports better comprehension than speed. 

Why regulation matters in futures and options 

Indian markets follow strict regulatory guidelines for derivatives. 

Position limits, margin rules, and disclosure norms exist to maintain stability. 

For you, these rules define boundaries and ensure transparency. 

Conclusion 

Futures and options form an important part of the Indian stock market, but they require a clear understanding before participation. They differ from equity trading in structure, obligations, and settlement. 

When you learn how futures and options work, you focus on mechanics rather than assumptions. Opening access begins when you open a demat account online and complete the required setup. 

As a new market participant, understanding futures and options at a conceptual level helps you read market activity with clarity. Over time, this knowledge supports informed engagement within a regulated and structured system.