F&O Contracts on NSE: Lot Size, Expiry, Settlement, and Margin

Futures and options, often shortened to F&O, are among the most actively traded products on Indian exchanges. They are also among the most misunderstood. Unlike shares, which you can buy one at a time and hold indefinitely, F&O contracts are standardised agreements with a fixed size, a fixed expiry date, and specific settlement and margin rules. This article explains each of those elements as a mechanism. Because the exact numbers — lot sizes, expiry days, margin percentages — are revised by the exchange and SEBI, it also points to where you can check the current figures.

Index and stock derivatives

On NSE, equity derivatives come in two broad types. Index derivatives have an index, such as NIFTY 50, as the underlying. Stock derivatives have an individual company's shares as the underlying. Only stocks that meet SEBI's eligibility criteria are allowed to have derivatives, and the list changes over time as stocks are added or removed.

Within each type, there are futures, which oblige both parties to transact at the agreed price on expiry, and options, which give the buyer a right but not an obligation, in exchange for a premium paid to the seller.

Lot size: the contract multiplier

F&O contracts trade in lots, not single units. The lot size is the number of units of the underlying that one contract represents. If an index future is trading at 22,000 and its lot size is a hypothetical 50, one contract has a notional value of 22,000 × 50 = ₹11,00,000. For a stock future trading at ₹1,200 with a hypothetical lot size of 500 shares, the notional value is ₹6,00,000.

Lot sizes are set by the exchange in line with SEBI's minimum contract value rules and are revised periodically as prices change. Never assume a lot size from an old article or video. NSE publishes current contract specifications, including lot sizes, on its equity derivatives contract information page.

Expiry: every contract has an end date

Each F&O contract has an expiry date, after which it ceases to exist. At any time, several expiries are usually available, such as near-month, next-month, and far-month contracts, and for some index options, shorter-dated contracts as well. The exchange decides which underlyings have which expiries and on which day of the week or month contracts expire.

These arrangements have been changed several times in recent years, including the number of weekly expiries permitted and the expiry day. If you are planning around an expiry, confirm the current schedule on NSE's website or in your broker's platform. A position held through expiry is settled automatically under the rules described below.

Settlement: cash or physical delivery

Index derivatives are cash-settled, since there is no practical way to deliver an index. At expiry, the difference between the contract price and the final settlement price is paid or received in cash.

Stock derivatives on NSE are settled by physical delivery at expiry under rules that SEBI introduced in phases. This means that if you hold a stock future or an in-the-money stock option into expiry, you may be required to take or give delivery of the underlying shares, with the full value payable rather than just a margin. Brokers often close such positions before expiry or ask for additional funds, so understand your broker's policy if you trade stock derivatives.

Daily mark-to-market on futures

Futures positions are marked to market each day. At the end of each trading day, the clearing corporation compares your position with that day's settlement price. If the price moved in your favour, the gain is credited to your account; if it moved against you, the loss is debited. You do not wait until expiry to realise gains and losses. A string of adverse days can therefore require you to keep adding money even if you expect the price to recover later.

Margin: why you do not pay the full value

To open a futures position, or to sell an option, you post margin rather than the full contract value. The clearing corporation sets margin requirements using a risk-based model that estimates how much the position could lose in a day under stressed conditions, with additional components on top. NSE Clearing explains its risk management framework for equity derivatives on its website.

If your margin falls below what is required because of losses, your broker will ask you to add funds. If you do not, the broker may close your position. Margin requirements can also be increased by the clearing corporation when volatility rises, which can force traders to add money at exactly the moment markets are most stressful.

Option buyers and option sellers carry different risks

An option buyer pays the premium upfront and does not need to post margin. The buyer's maximum loss is the premium paid. An option seller receives the premium but must post margin, because the seller's potential loss can be much larger than the premium received, and for some positions it is not capped. This asymmetry is central to understanding why option selling requires significantly more capital and risk management than option buying.

Leverage cuts both ways

Because margin is a fraction of notional value, F&O positions are leveraged. A move of 1% in the underlying can mean a much larger percentage change relative to the margin you posted. SEBI has published studies of individual traders in equity F&O that found a large majority lost money over the periods studied, and it has repeatedly tightened rules for retail participation. These findings are worth reading on SEBI's website before trading derivatives.

Costs specific to F&O

F&O trades carry brokerage, exchange transaction charges, securities transaction tax on certain legs, stamp duty, SEBI fees, and GST on some charges. The rates differ between futures and options and between buy and sell sides, and they change from time to time. Your broker's charges page and contract notes show the current amounts.

A checklist before trading F&O

• Look up the current lot size and calculate the notional value of one contract in rupees.
• Confirm the expiry date and the settlement type for the specific contract.
• Understand the margin required and how much the position could lose in a bad day.
• Know whether you are buying or selling options, and what your maximum loss is.
• Check your broker's policy on stock derivatives positions near expiry.
• Decide in advance at what loss you would exit, and size positions so that a bad outcome does not threaten your finances.

F&O contracts are powerful tools for hedging and for expressing views on prices, but their standardised structure comes with obligations that shares do not have. Knowing exactly how lot size, expiry, settlement, and margin work is the minimum before putting real money into them.