Derivatives | Futures and Options for the Systematic Investor
The F&O market in India is one of the largest derivatives markets in the world by volume. Most retail participants lose money in it. Systematic investors can use it intelligently for hedging | not for speculation.
TK
Tanmay Kurtkoti
Founder & CEO, RupeeCase · QC Alpha
⏱ 15 min read⟳ Updated 6 May 2026◆ Intermediate
SEBI's 2023 study found that over 90% of individual F&O traders in India lost money over a 3-year period. The average loss was significant. And yet NSE's F&O segment is among the most active derivatives markets globally. The disconnect is explained by the same thing that drives lottery ticket sales: a few visible winners, millions of invisible losers.
This module is not about trading derivatives for profit. It's about understanding what derivatives are, how they work mechanically, and the limited but genuine ways systematic equity investors can use them | primarily for portfolio hedging during high-risk periods.
93%
Retail F&O traders lose money SEBI 2023
1.10L
Avg net loss per retail F&O trader
25
Nifty lot size
Thu
Weekly expiry day Nifty
SEBI sample covered 46 lakh individual F&O traders over FY2019 to FY2022. The 93% loss rate held even in bull markets. The median holding period was under a week. This is not a casual stat, it is the base rate.
1
Underlying exposure
Nifty 50 or single stock in the F&O list
2
Contract choice
Futures for linear, options for non linear
3
Lot and margin
SPAN + exposure margin, brokerage blocks it upfront
4
Daily MTM
Settle mark to market every day, top up if below SPAN
5
Expiry or rollover
Cash settle in index, physical settle in stock F&O
The physical settlement rule since 2019 is the thing most retail traders miss. If you forget to close a stock futures long on expiry Thursday, you take delivery worth 25 times the last price in cash.
NSE F&O turnover split by instrument
Index options 78%
Stock options 16%
Futures 6%
Who is on the other side of retail
Pro proprietary 52%
FII & FPI 30%
DII & HNI 18%
Every time a retail option buyer pays premium, a pro writer with models and capital is collecting. The asymmetry is not a secret, it is printed in the SEBI report.
Legitimate hedging use cases by purpose
Portfolio PUT hedge event
High value
Covered call on held stock
Useful
Delta hedging large block
Situational
Directional speculation
Destructive
Weekly expiry 0DTE gambling
Pure loss
My hard rule: derivatives are a hedging and sleeve management tool, not a speculation tool. Every expiry Thursday spent buying OTM options is a tuition fee to the writers on the other side.
From my notebook
In early 2024 I modelled the real cost of a typical weekly expiry OTM call buyer at NIFTY. Rs 12 premium, breakeven 150 points away, expiry that evening. Win rate 18%, payoff ratio 1:3.2. Expectancy negative 1.6 rupees per rupee risked. I showed this to an intern who was sure he had a system. He was adamant, kept trading for another three months, ended down 1 lakh 40 thousand on a 2 lakh capital base. When he came back I wrote him a one line rule: if you want to trade options, be a writer with defined risk or do not trade options at all. Every rupee that retail pays on weekly expiry goes to the same twelve pro desks. That is not a market, that is a toll booth.
Futures | the mechanics
A futures contract is an agreement to buy or sell an asset at a predetermined price on a future date. On NSE, equity futures exist on individual stocks and on indices (Nifty 50, Bank Nifty, etc.). Key mechanics:
Lot size
Each futures contract represents a fixed number of shares | the "lot size." Nifty 50 futures have a lot size of 25 (minimum contract value ~₹10 to 12L). Individual stock futures have lot sizes ranging from 75 to 10,000 shares depending on the stock's price. You cannot trade a fraction of a lot.
Margin
You don't pay the full contract value | only a margin (typically 10 to 20% of contract value). This creates leverage. A ₹10L Nifty futures position might require only ₹1.5L margin. This leverage amplifies both gains and losses | the primary source of retail trader losses.
Expiry
NSE equity futures expire on the last Thursday of each month (monthly) with weekly contracts also available for major indices. At expiry, contracts are cash-settled | the difference between your entry price and the final settlement price is paid/received.
Mark-to-market
Futures positions are marked to market daily. If Nifty falls and you're long, the loss is debited from your account that evening. If your margin falls below the maintenance margin, you receive a margin call and must top up or face forced liquidation.
Options give the right but not the obligation to buy (call option) or sell (put option) an asset at a specified price (strike price) before or on the expiry date. Key difference from futures: the option buyer's maximum loss is the premium paid. The option seller can face unlimited loss (for calls) or large loss (for puts).
Contract
Buyer's right
Buyer's max loss
When buyer profits
Call option
Buy asset at strike price
Premium paid
Asset price rises above strike + premium
Put option
Sell asset at strike price
Premium paid
Asset price falls below strike − premium
India's options market is almost entirely index options | Nifty 50 weekly and monthly options dominate by volume. Individual stock options exist but are far less liquid.
Open interest as a market signal
Open interest (OI) is the total number of outstanding derivative contracts that have not been settled. It's not the same as volume | volume counts every trade, OI counts only open positions.
Rising OI combined with rising price = bullish (new money entering long positions). Rising OI with falling price = bearish (new money entering short positions). Falling OI regardless of direction = positions being closed out, often near expiry.
For systematic equity investors, F&O OI data is a useful secondary signal | it shows where large institutional positions are concentrated and can indicate potential market turning points around expiry dates.
For a systematic equity portfolio running a Nifty 500 momentum strategy, derivatives offer one practical tool: index hedging during high-risk periods.
The logic: a momentum portfolio is long ~30 stocks and has nearly 100% market beta (it moves roughly with the market). If your risk model identifies a high-volatility regime (e.g., geopolitical shock, election outcome uncertainty), you can:
Short Nifty futures by the equivalent of your portfolio value | this creates a market-neutral position. Your portfolio's alpha (factor return) remains, but beta (market exposure) is removed.
Buy Nifty put options | this provides downside protection with limited cost (the put premium), while keeping upside. More expensive than shorting futures but preserves upside.
What derivatives are not for: Leveraged speculation on individual stock price movements, intraday F&O trading for income, or trying to "time the market" using options. SEBI's data is definitive | over 90% of individual F&O traders lose money. Systematic investing in equities already gives you documented long-term positive expected returns. Derivatives speculation has negative expected returns for the average retail participant.
> 90%
Individual F&O traders who lost money over 3 years, per SEBI's 2023 study. The most important statistic here.
25
Lot size for Nifty 50 futures contracts on NSE. One lot = 25 units. At Nifty ~24,000, one lot = ₹6L notional value.
Derivatives and RupeeCase
RupeeCase equity factor strategies are currently pure long-only equity strategies | no leverage, no derivatives. The platform tracks Nifty F&O OI data as a secondary market regime indicator, available in the Research Lab. For investors with large portfolios who want to hedge market risk around specific events (budget, elections), the Nifty futures hedge calculation is available as a tool: enter your portfolio value and target hedge ratio to get the number of lots required. Available at invest.rupeecase.com.
Glossary
Key terms | Module 6.6
Futures contract
Agreement to buy/sell an asset at a set price on a future date. Daily mark-to-market. Requires margin, not full payment. NSE equity futures expire last Thursday of each month.
Options contract
Right (not obligation) to buy (call) or sell (put) an asset at a specified price. Buyer's loss limited to premium. Seller's risk can be substantial.
Lot size
The minimum number of shares per derivatives contract. Nifty 50 futures = 25 units per lot. Cannot trade fractions of a lot.
Open interest
Total outstanding derivative contracts not yet settled. Rising OI = new positions being created. Falling OI = positions being closed. Used as a market sentiment signal.
Mark-to-market
Daily settlement of gains and losses on futures positions based on closing price. Margin must be maintained | shortfall triggers a margin call.
TK
A note from the author
Why this matters
Derivatives are the most powerful | and most dangerous | instruments available to Indian investors. NSE's F&O segment is among the world's most active, yet most retail participants lose money because they treat options as lottery tickets rather than precision tools. This module builds your understanding from the ground up so you can use futures and options the way professionals do: for hedging, income, and structured risk-taking.
Want to put this into practice? RupeeCase is the systematic investing terminal built around everything you're learning here, factor scores, strategy backtests, portfolio construction for Indian markets.
This course is free. Help someone else learn about Derivatives | Futures and Options, share it with one person who needs this.
📋 Suggested LinkedIn post, copy & paste
Just completed Module 6.6 of Tanmay Kurtkoti's free investing course on RupeeCase. Learning about Derivatives | Futures and Options. Completely free at rupeecase.com/learn
Long call and long put. Indian lot sizes. Treats premium per unit and computes per-lot economics.
Quick check, Module 6.6
3 questions. Get 2 right to mark this module complete.
0 of 3 answered
✓
Module complete. Keep going.
Up next, Module 6.7
Bonds and Fixed Income in India
G-Secs, SDLs, corporate bonds, RBI Retail Direct, yield-to-maturity, duration risk, and the role of fixed income in a systematic multi-asset portfolio.