Futures  Options Explained High Profits Higher Risks  SEBIs Mandatory Warning for Traders,

 Introduction What Exactly Is Derivative Trading.

In the stock market there are two major worlds.

1   Cash Market    where you buy and sell shares directly

2   Derivative Market    where you trade contracts based on the  future price  of an asset

Derivative trading often sounds glamorousmany online gurus promise overnight profits daily income and shortcuts to getting rich

In reality derivatives are   highrisk financial instruments  

SEBI Securities and Exchange Board of India has repeatedly warned that most retail traders lose money in Futures  Options FO

This article explains

  What derivatives are

  How futures and options work

  Margin premium strike price expiry and lot size

  Difference between buyers and sellers

  Why SEBI is concerned

  Why 7 out of 9 traders lose money in FO

  Risk management for safe trading

Lets begin

    1 What Are Derivatives  

A   derivative   is a financial contract whose price is derived from another asset

Examples

  Nifty futures derive value from the Nifty Index

  Gold futures from Gold prices

  Crude Oil futures from crude prices

So derivatives dont have their  own  valuethey depend on the underlying asset

There are two primary types of derivative contracts

1   Futures  

2   Options  

    2 What Is a Futures Contract  

A Futures Contract is an agreement to buy or sell an asset  at a specific price on a specific future date 

Example

You buy a Nifty Future at   24000  

  If Nifty rises to   24300   you make 300 points profit

  If Nifty falls to   23700   you lose 300 points

   Characteristics of Futures  

  High profit potential

  High loss potential

  Uses margin leverage involved

  Directly affected by price movement

   Key Risks in Futures  

1   Unlimited Loss  

2   Forced Liquidation Auto SquareOff  

Futures are generally used by experienced traders because of extreme risk

    3 What Are Options  

Options give you   the right but not the obligation   to buy or sell

Two types of Options

    Call Option  Bet on price going UP  

    Put Option  Bet on price going DOWN  

 Two Parties in Options

    Buyer    Limited loss unlimited profit potential

    Seller Writer    Limited profit unlimited loss

Options Buyers are safer

Options Sellers face maximum risk

    4 Important Terms in Derivative Trading  

   1 Lot Size  

Derivatives are traded in lots not single shares

Example

  Nifty lot  25 units

  BankNifty lot  15 units

   2 Premium  

Price you pay to buy an option

   3 Strike Price  

The agreed price at which you can exercise the option

   4 Expiry  

When the contract ends

  Index options  Weekly expiry

  Stock options  Monthly expiry

   5 Margin  

The security deposit required for futures or option selling

    5 Futures vs Options Quick Comparison  

 Feature           Futures        Options            

      

 Risk              Unlimited      Buyer  Limited    

 Profit Potential  Unlimited      Unlimited          

 Cost              High Margin  Low Premium      

 Compulsion        Yes            Only Seller        

 Suitable For      Experts        Beginners Buyers 

    6 Why Is SEBI Worried About FO Trading  

SEBI released a detailed study that revealed shocking facts

    89 retail traders lose money in FO  

    Traders collectively lost over 125 lakh crore in one year  

    Majority losses were in Options Selling  Futures trading  

    Influencers mislead people with false claims  

SEBIs concern is that the youth and middleclass are treating FO like a   gambling platform  

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    7 SEBIs Major Warnings to Traders  

    1 Leverage is dangerous  

You can make big profits OR big losses within minutes

    2 Guaranteed profit is a scam  

No such strategy exists

    3 FO is not meant for investment  

It is a highrisk trading tool

    4 Dont trust online influencers selling courses signals or guaranteed tips  

    5 You cannot hold brokers responsible for your losses  

    8 Options Buyer vs Seller  The Real Game  

   Option Buyer  

  Low investment

  Limited risk

  High profit potential

    But  

  Time Decay Theta reduces value daily

   Option Seller  

  Earns premium

  Higher probability of profit

    But  

  Unlimited risk

  Huge margin required

  Unexpected market moves cause massive losses

    9 What Are Derivatives Actually Used For  

Derivatives are meant for

   Hedging Risk Protection  

Example

An investor holding a 10 lakh portfolio fears a market fall

He buys   Put Options   to protect his downside

This is the real purposenot gambling

    10 Why Do Traders Lose Money in FO  

   1 Trading without knowledge  

No understanding of premium delta theta IV etc

   2 Overtrading  

Taking too many trades

   3 Greed and unrealistic expectations  

   4 Blindly following YouTubers Influencers  

   5 No stoploss or risk management  

   6 Emotional trading fear  greed  

   7 Misuse of leverage  

    11 Can You Make Money in Derivatives  

  Yes   but only if you have

  Proper education

  Discipline

  Trading psychology

  Tested strategy

  Strong risk management

Without these FO is a losing game

    12 How to Trade Safely Risk Management Rules  

  Risk only 12 of capital per trade

  Avoid futures initially

  Always use stoploss

  Never trade based on influencers

  Start with Option Buying

  Dont treat trading like gambling

  Investors should use FO only for hedging

    13 Should You Start FO Trading  

You  may  start if

  You study the market

  Learn strategies

  Understand risk

  Can handle losses

  Follow discipline

Avoid FO completely if

  You want overnight success

  You get influenced easily

  You trade emotionally

Even SEBI strongly suggests this

    14 Conclusion  

Derivative Trading is powerful

but extremely risky if not understood properly

Futures  Options offer

  High profit opportunities

  But even higher risk

SEBIs message is simple

   Trade only if you understand the risksdont trade blindly  

If you trade with knowledge discipline and risk control derivatives can be profitable

If you trade blindly derivatives can wipe out your entire capital.

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