Futures and Options (F&O) trading involves derivatives, which are financial contracts that get their value from assets like stocks, commodities, or currencies. These contracts let you buy or sell assets at a set price on a future date.
However, F&O trading is not available for all listed stocks. It is possible only on select stocks that are included in the F&O stock list. This list is curated by the Securities & Exchange Board of India (SEBI), which sets the eligibility criteria to ensure that only the most suitable and stable stocks are available for F&O trading.
Before diving into F&O trading, reviewing the F&O stock list is crucial. If you’re new to F&O trading, understanding which stocks are eligible and why they are selected is essential. In this blog, you will find a detailed explanation of F&O stocks, their benefits, the eligibility criteria for the F&O stock list, and more.
Futures and Options (F&O) stocks are part of derivative trading. A derivative is a financial instrument or a contract that derives its value from an underlying asset, like a stock, commodity, etc. When you trade F&O stocks, you're dealing with agreements (contracts) to buy or sell stocks at a future date or at a specific price. This allows you to predict and profit from stock price changes without actually owning the stocks.
These are contracts for buying or selling an asset at a future date and at a pre-agreed price. For example, if you believe the price of Reliance Industries stocks will increase, you can buy a futures contract today, agreeing to purchase the stock at a later date for today's price.
These give you the right, but not the obligation, to buy or sell an asset at a predetermined price before a certain date. There are two types of options:
- Call Options
A Call Option gives you the right, but not the obligation, to buy a stock at a specific price (also called the strike price) before a certain date. Let's say you expect the price of Reliance Industries stocks to increase. You can buy a Call Option on this stock, which allows you to get the stock at the strike price at a future date. This way, you can profit from a potential price rise.
- Put Options
A Put Option gives you the right, but not the obligation, to sell a stock at a specific price (the strike price) before a certain date. Let's say you expect the price of Reliance Industries to go down. You can buy a Put Option on this stock, allowing you to sell it at the strike price. This way, you can profit from a potential price decline.
To find out which stocks form part of the F&O Stock list, refer to the links below:
1. NSE - List of underlyings
2. BSE - List of underlyings
By referring to the F&O stock list in these links, you can be well-prepared for F&O trading. This list can aid your decision-making and F&O trading strategy.
Read More - How to Become Pro in the Equity Market?
To be included in the future and options stock list, a stock must meet the following criteria as prescribed by SEBI:
1. It must be among the top 500 stocks based on average daily market capitalisation and average daily traded value over the last six months on a rolling basis.
What is Market capitalisation?
It is the total value of a company’s shares on the stock market. You can determine a company’s market capitalisation by multiplying its current share price by the total number of shares outstanding.
2. A stock's median quarter-sigma order size should be at least Rs 25 lakh (as measured over the previous six months). This simply means that the stock's average order size, adjusted for price volatility, should be at least Rs. 25 lakhs over the last six months.
3. The market-wide position limit in the stock must be at least Rs 500 crore. This means that the total value of all positions (buy and sell) held by all traders in a particular stock should be at least Rs 500 crore.
4. The cash market's average daily delivery value must exceed Rs 10 crores over the past six months on a rolling basis. This means that the average daily value of stocks actually delivered (bought and sold) in the cash market should be at least Rs 10 crore over the past six months, continuously updated.
Read more - Complete list of eligibility criteria for stocks with options list
Trading in F&O stocks offers several benefits, especially if you are looking to hedge, speculate, or leverage your investments:
- Leverage: With F&O trading, you can control a large position with a small amount of money. For example, instead of needing Rs 1,00,000 to buy 100 shares of a company, you might only need Rs 10,000 in an F&O contract to control those same 100 shares. This leverage allows you to earn higher profits potentially.
- Hedging: You can use F&O contracts to protect your portfolio from potential losses. For example, if you own a stock that you think might go down in price, you can buy a Put Option to offset the loss.
- Flexibility: F&O contracts allow you to profit in different market conditions. For instance, you can make money when the market is rising by using Call options, and you can also make money when the market is falling by using Put options. With this flexibility, you can adapt your trading strategies as per market trends.
- Speculation: F&O stocks are ideal for speculative trading. This means you can try to profit from short-term price movements by predicting how the prices will go.
F&O trading can result in profits, but it comes with serious risks. The BSE and NSE carefully monitor the F&O stock list to ensure stability and protect investors. They often intervene during periods of high volatility by increasing margin requirements. Hence, you may need more funds to maintain your positions on specific stocks.
As a trader, you need to stay updated with exchange announcements and understand that trading in F&O stocks can be unpredictable. Always use risk management tools like stop-loss orders to protect your investments. A stop-loss is an order placed with your broker to automatically buy or sell a stock or option when it arrives at a certain price point. This helps in limiting your potential losses.
F&O stocks can offer you exciting opportunities to speculate, hedge, and leverage your positions in the market. However, it's crucial to approach F&O trading with a thorough understanding of the risks and strategies involved. If you're new to F&O trading, consider starting with small positions and gradually increasing your exposure as you gain experience. To stay informed and learn new F&O trading techniques, visit the Sharekhan Knowledge Centre.
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