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.