Futures & Options — Complete Guide
Understanding derivatives, hedging strategies, and why naked positions are dangerous — explained simply.
What is Hedging?
Hedging means protecting your investments. Just as you buy insurance for your home, car, or health, hedging is insurance for your stock portfolio. When markets fall, a hedged portfolio suffers less because the hedge position generates offsetting profits.
How Hedging Works — Example:
Suppose you hold ₹5 lakhs worth of stocks. You fear a market downturn. You buy a Nifty Put Option costing ₹10,000.
Market drops 10% → Your stock loss is ₹50,000 → But your Put Option gains ₹40,000 → Net loss is only ₹10,000 + ₹10,000 (option cost) = ₹20,000. Without hedging, your loss would have been ₹50,000.
Hedging is not about making profits — hedging is about reducing losses.
Naked Positions — Why They Should Be Avoided
A naked position means taking a one-sided position in Futures or Options without any protective hedge. This is extremely risky because if the market moves against you, your losses can be unlimited.
Risks of Naked Positions
- Unlimited loss potential — no cap on how much you can lose
- Margin calls — broker may demand additional funds suddenly
- Forced square-off — broker can close your position at a loss
- Emotional decisions — large losses lead to panic-driven mistakes
Benefits of Hedged Positions
- Limited losses — maximum loss is predefined
- Calm decision-making — no panic required
- Lower margin requirement for hedged positions
- Ability to stay in the market for longer
Position Continuation — Only When Hedged
Continuation means rolling over a derivative position from one expiry to the next. Trade Encore's clear stance is: positions should only be rolled over when they are hedged.
Trade Encore's Rules for Continuation:
- 1 Never roll over a naked (one-sided) position.
- 2 A protective hedge must be in place before any rollover.
- 3 Exiting a losing naked position is better than continuing it.
- 4 Every rollover decision should be based on fresh analysis — never roll over blindly.
SEBI Report — Risks in Derivative Trading
SEBI (Securities and Exchange Board of India) published a landmark study on Futures & Options trading in January 2023. Key findings from the report:
of F&O traders incurred losses (in FY22)
aggregate loss by individual traders (FY22)
Key Findings from SEBI Report:
- Most retail traders lose money in F&O — only 11% of traders made a profit.
- Average loss per trader was ₹1.1 lakh, with transaction costs (brokerage, STT, etc.) adding to the loss.
- Even experienced traders (3+ years) lost money — 79% of experienced traders incurred losses.
- For newer traders (0-2 years), the situation was worse — over 90% lost money.
SEBI's Warning:
"A majority of individual traders in Futures & Options (F&O) incur losses. F&O is a complex and high-risk instrument and is not suitable for all investors." — SEBI Study, 2023
Trade Encore's Approach to Derivatives
Given the facts from the SEBI report above, Trade Encore's derivative recommendations are primarily for hedging (portfolio protection). Our aim is not to encourage speculation in F&O — but to protect your existing portfolio from adverse market movements.
Protection First
Hedging, not speculation
Hedged Recs
Both sides covered
Risk Awareness
Risk clearly stated with each rec
Other Guides
Start Investing Safely
Get hedged derivative recommendations from a SEBI Registered Research Analyst.
Important Disclaimer:
Futures & Options (F&O) are high-risk financial instruments. As per SEBI's study, 89% of F&O traders incur losses. Derivative trading is not suitable for all investors. Please understand the risks involved before investing. Trade Encore never trades on your behalf.
SEBI Registration No.: INH000009269 | BSE Enlistment: 5530