What are the risks of trading Futures and Options (F&O)? (2024)

Futures and options (F&O) are complex and leveraged financial instruments that can lead to permanent loss of capital if traded without understanding the risks.

Common risks of F&O trading include:

• F&O orders can be executed partially or with significant price differences due to liquidity and market volatility.
• Due to a large difference in the buying and the selling price, orders can be executed at prices far from the Last Traded Price (LTP), increasing impact costs. Here’s an example:
  
  The contract above is illiquid. Placing a market buy order for 100 shares based on the LTP will result in the order being executed at the price of ₹19.85. In this case, the difference of ₹10.8 is the impact cost. Impact costs can be reduced using Iceberg orders. To learn about more impact costs and Iceberg orders, see What are Iceberg orders, and how to use them?

• Buying options can result in losing the entire premium paid, while selling options can lead to even greater losses than the initial margin if the price doesn't move as expected. Always calculate the payoff to check your positions' maximum profit and loss using the Kite position analyzer. To learn more, visit tradingqna.com/t/new-kite-feature-f-o-positions-analysis-tool-by-sensibull/106432.
• If the price does not move in the expected direction for future positions, the losses could be higher than the initial margin.
• Positions can have their dynamic margin requirements go up, which can cause margin shortfalls. Any shortfall must be added to the account to avoid our RMS system squaring off your positions. To learn more, see Why are margins blocked for F&O positions higher than exchange mandated margins?
• There are physical settlement risks for stock futures and stock option positions that expire In The Money (ITM). These risks include taking delivery of the underlying shares without sufficient funds and short delivery risks. To learn more about physical delivery risks, visit zerodha.com/z-connect/queries/stock-and-fo-queries/physical-delivery-of-stock-fo-their-risks
• Risks of giving your login information to scammers who claim they can help you make more money by managing your money or giving you financial advice. To learn more about such scams, visit zerodha.com/z-connect/tradezerodha/beware-of-the-phishing-scam.
• Higher leverage may lead to losses higher than the initial margin.

To learn more about F&O trading and its risks, visit zerodha.com/varsity. To view the video version of Varsity, visit youtube.com/@varsitybyzerodha/featured.

When an account is opened, a copy of the RDD is sent to the registered email address. The Risk Disclosure Document (RDD) contains important information concerning risks that all investors, whether individual, non-individual, retail or institutional, take while trading or investing in any capital market instrument in all situations. To learn more, see What is Risk Disclosure Document (RDD) & Equity & Commodity Annexure Documents?