Futures and Options (F&O) are complex and leveraged financial instruments that can lead to substantial loss of capital if you trade without understanding the risks.
Common risks of F&O trading include:
- Partial execution and price slippage: Your F&O orders can execute partially or with significant price differences due to liquidity and market volatility.
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Impact costs from illiquid contracts:
When you place orders in illiquid contracts, a large difference between the buying and selling price can cause your orders to execute at prices far from the Last Traded Price (LTP), increasing impact costs. Here’s an example:
The contract shown above is illiquid. If you place a market buy order for 100 shares based on the LTP, your order will execute at ₹19.85. In this case, the difference of ₹10.8 represents the impact cost. You can reduce impact costs by using Iceberg orders.
- When you buy options, you risk losing the entire premium you paid. When you sell options, you can face losses even greater than your 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 analyser. Learn how to use this tool by visiting tradingqna.com/t/new-kite-feature-f-o-positions-analysis-tool-by-sensibull/106432.
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Futures position losses:
If the price does not move in your expected direction for futures positions, you could face losses higher than your initial margin.
- Margin requirement changes: Your positions can have their dynamic margin requirements increase, which causes margin shortfalls. You must add any shortfall to your account to prevent our RMS system from squaring off your positions.
- Physical settlement risks: Stock futures and stock option positions that expire In The Money (ITM) carry physical settlement risks. These include taking delivery of the underlying shares without sufficient funds and short delivery risks. Understand these risks in detail by visiting zerodha.com/z-connect/queries/stock-and-fo-queries/physical-delivery-of-stock-fo-their-risks
- Phishing and fraud risks: Never share your login information with anyone claiming they can help you make more money by managing your funds or giving you financial advice. Learn how to protect yourself from such scams at zerodha.com/z-connect/tradezerodha/beware-of-the-phishing-scam.
- Leverage risks: Higher leverage can lead to losses that exceed your 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.
Risk Disclosure Document (RDD)
When you open your account, we send a copy of the Risk Disclosure Document (RDD) to your registered email address. The RDD contains important information about the risks that all investors face when trading or investing in any capital market instrument.