Futures and Options Basics India: Lot Size Expiry Margin Settlement

What are futures and options contracts?

Futures and options are standardised derivative contracts that derive their value from an underlying asset such as Nifty 50, Bank Nifty or individual stocks like TCS and Reliance. A futures contract obligates both parties to transact at a predetermined price on expiry, while an options contract gives the buyer the right—but not the obligation—to buy (call) or sell (put) the underlying at a strike price. Sellers of options are obligated to honour the contract if the buyer exercises the right.

NSE offers index derivatives (cash-settled) and stock derivatives (physically settled). Both require traders to understand lot size, expiry dates, margin obligations and settlement procedures before entering positions.

What is lot size and why does it matter?

Lot size is the minimum number of units in a single contract. Traders cannot buy or sell fractions of a lot; every position must be in multiples of the standard lot. For example, Nifty 50 has a lot size of 65, meaning one Nifty futures or options contract represents 65 units of the Nifty index. Bank Nifty lot size is 30. Individual stock lot sizes vary; TCS has a smaller lot size than higher-priced stocks to maintain accessibility.

SEBI raised the minimum notional value for index derivatives to Rs 15 lakh in November 2024 to reduce speculative volumes. Exchanges adjust lot sizes periodically to keep contract values near regulatory targets. A higher lot size increases the capital requirement and risk per contract, making position sizing critical for retail traders.

When do F&O contracts expire?

Monthly NSE contracts expire on the last Tuesday of each month. If Tuesday is a trading holiday, expiry moves to the preceding trading day. Additionally, Nifty 50 offers weekly expiry on every Tuesday, giving traders near-term hedging and speculative opportunities. Bank Nifty and stock derivatives follow only the monthly cycle.

Expiry time is typically around 3:30 PM on the expiry day. In-the-money (ITM) options are automatically exercised at expiry; out-of-the-money (OTM) options expire worthless. Futures positions not squared off before expiry settle according to the final settlement price calculated by the exchange.

Traders often roll over positions to the next month by closing the current month's contract and opening an identical position in the following month, incurring additional transaction costs and potential slippage.

How do margin requirements work?

SEBI's peak-margin rule requires brokers to collect 100% of the required margin upfront for all F&O positions. This rule was phased in at 25% (December 2020), 50% (March 2021), 75% (June 2021) and reached 100% in September 2021. The total margin has two components:

Standardised Portfolio Analysis of Risk (SPAN) is calculated by the clearing corporation based on worst-case loss scenarios across price and volatility movements. SPAN margin is dynamic and changes with market volatility.

Additional margin charged on top of SPAN to cover extreme tail risks. The clearing corporation sets exposure-margin percentages, which vary by instrument and market conditions.

Option buyers pay the full premium upfront and do not face further margin calls, since their maximum loss is limited to the premium paid. Option sellers must maintain margin because their risk is theoretically unlimited (for call writers) or substantial (for put writers).

Intraday equity trading leverage is capped at roughly 5× (20% margin) under SEBI guidelines, limiting the use of excess leverage that contributed to retail losses in earlier years.

What is the settlement process?

Settlement determines how obligations are fulfilled when a contract expires or is exercised. NSE uses two distinct methods:

Index futures and options settle in cash. No physical delivery of the Nifty 50 or Bank Nifty basket occurs. The exchange calculates a final settlement price based on the weighted average of index values during the last half-hour of trading on expiry day. Profit or loss is credited or debited to the trader's account in cash.

Stock futures and options result in actual delivery of shares. If a trader holds a long futures position at expiry, shares are delivered to the demat account and the full contract value is debited. Short futures positions require delivering shares from the demat account. Exercised stock options also trigger delivery. Most retail traders square off positions before expiry to avoid delivery obligations, which require full funding and carry additional short-delivery risks.

Settlement follows the T+1 cycle: trades executed on day T are settled on T+1. Funds and securities move between accounts the day after expiry or exercise.

Worked example

Consider a trader observing TCS stock on NSE during October 2026. On 14 October 2026 TCS closed at Rs 2,304.90. The trader buys one lot of TCS November futures at Rs 2,310. Over the following sessions, TCS rallied: 15 October close Rs 2,350.00, 16 October close Rs 2,465.00, 19 October close Rs 2,460.90. By 21 October 2026 TCS closed at Rs 2,529.00.

On 21 October the trader squares off the November futures position at Rs 2,530, capturing a gain of Rs 2,530 − Rs 2,310 = Rs 220 per share. Assuming a lot size of 100 shares, the gross profit is Rs 220 × 100 = Rs 22,000. From this, the trader deducts Securities Transaction Tax (0.05% on sell side: 0.05% × Rs 2,53,000 = Rs 126.50), stamp duty (0.002% on buy side: 0.002% × Rs 2,31,000 = Rs 4.62), brokerage, exchange transaction charges, SEBI turnover fee (Rs 10 per crore) and GST (18% on brokerage, charges and SEBI fee). After all costs, net profit is credited to the trading account on T+1.

This profit is classified as non-speculative business income under the Income-tax Act, 2025, and taxed at the trader's applicable slab rate. The trader must maintain books of accounts and may require a tax audit if F&O turnover exceeds the prescribed threshold. Consultation with a chartered accountant is advisable for accurate computation and compliance.

Common mistakes

Many retail traders underestimate the capital required per lot after SEBI raised the minimum contract value to Rs 15 lakh. Entering multiple lots without adequate margin leads to forced square-offs and penalties. Another frequent error is ignoring physical settlement for stock derivatives: holding stock futures or ITM stock options into expiry triggers delivery, requiring full contract value in the account or shares in the demat. Traders also overlook the difference between speculative (intraday equity) and non-speculative (F&O) income, leading to incorrect tax filings. Finally, rolling over losing positions month after month compounds transaction costs and often results in larger cumulative losses. Disciplined position sizing, clear exit rules and understanding settlement mechanics reduce these pitfalls.