What are the risks of trading in Futures and Options (F&O)?

Futures and Options (F&O) are advanced trading instruments that involve leverage, which can amplify both profits and losses. Without proper knowledge and risk management, trading in F&O can result in significant — and sometimes irreversible — financial losses.

Trading in F&O carries significant risks and is not suitable for all investors, SEBI recommends that investors fully understand the risks and trade only through SEBI-registered brokers.

Detailed Explanation:

1. High Leverage: Only a margin is required to take large positions, so even small price movements can result in heavy losses.
2. Unlimited Loss Potential: In case of selling/writing options or holding adverse futures positions, losses can be theoretically unlimited.
3. Market Volatility: Sudden price swings in the market can cause rapid gains or steep losses.
4. Time Decay in Options: Option buyers lose value as expiry approaches if the stock doesn’t move in the expected direction.
5. Liquidity Risk: In some contracts, low trading volumes may make it difficult to exit positions at the desired price.
6. Complexity: F&O products are more complex than regular shares trading, and lack of understanding can lead to costly mistakes.

Risk Disclosure Document (RDD):

When you open a trading account, a copy of the RDD is sent to your registered email. It details all risks involved in trading and investing, applicable to all types of investors. Reading it, is essential for informed decisions and responsible risk management.

Example to Understand: Suppose you buy 1 lot of stock futures worth ₹5,00,000 by paying only ₹50,000 as margin. If the stock price falls by just 5%, the contract loses ₹25,000 in value — which means you lose half of your margin money in one move. This shows how leverage can amplify losses.