F&O trading carries meaningfully higher risk than buying shares outright, mainly because of leverage, time-bound expiry, and the possibility of losses that exceed your initial margin on certain positions. Understand these risks before you start trading F&O.
How does leverage increase risk in F&O?
F&O lets you take a position worth many times your margin, so price moves are magnified. A small adverse move in the underlying can erode a large share of your margin quickly, much faster than the same rupee move would on a Delivery position of equivalent value.
Can I lose more than my margin in F&O?
Yes, on certain positions. Buying an option caps your loss at the premium you paid. But Futures positions and sold (written) options can lose more than your initial margin, if the underlying moves sharply against you, you may need to add margin, and an unresolved shortfall can lead to your position being squared off at a loss.
How does time decay affect Options?
An option loses value as it approaches expiry, even if the underlying price doesn't move. This is called time decay. If you're holding a bought option, time works against you: it can still expire worthless if the underlying doesn't move enough in your favor before expiry.
What other risks should I know about?
- Expiry/settlement risk, if you don't square off before expiry, your position is settled automatically as per the contract's expiry rules, which may not match what you'd have chosen to do yourself.
- Liquidity risk, far out-of-the-money or thinly-traded strikes can have wide bid-ask spreads, making it harder to enter or exit at a fair price.
- Volatility risk. An option's price is sensitive to implied volatility, so it can move even when the underlying's price barely changes.
Things to keep in mind
- F&O is a leveraged product, only trade what you can afford to lose beyond your margin.
- Selling (writing) options carries a different, generally higher, risk profile than buying them.
- Trade F&O only once you understand margin requirements, expiry mechanics, and how the specific contract behaves.