TRADING DYNMICS OF FUTURE AND OPTIONS: A CONCEPTUAL FRAME WORK IN THE INDIAN DERIVATIVES MARKET

Abstract

One of the most active parts of India's whole financial sector is now the Indian derivatives market. A vital component of that ecosystem, futures and options (F&O) are essential for risk hedging, permitting speculation, and offering price discovery to both traders and investors. By examining Market Structure, Regulatory Framework, and Trends in Market Participation, it will investigate the fundamental elements propelling the growth and functioning of the Indian F&O Market. While the asymmetrical reward structure of an option provides flexibility to extend different trading methods, futures allow market players to trade standardized contracts for risk transfer. The way the F&O Market functions will be greatly influenced by additional factors like volatility profiles, the type of algorithmic trading, high-frequency trade execution, open interest characteristics, and margining mechanisms. Additionally, this study will describe how SEBI (Securities and Exchange Board of India) regulations—such as modifications to lot sizes, physical settlement requirements, and increased transparency requirements—have affected market participation and stability. It talks about the growth of institutional traders, proprietary firms, and retail investors and how they can give the market depth and liquidity. Lastly, it will focus on the Trend Shifts in the Derivative Market, such as the Increasing Integration of Worldwide macroeconomic Signals, the Growing Number of Weekly Index Options, and the Growing Use of Retail Options Selling. The connections between futures and options and their effects on India's financial system as a whole are covered in detail in this article. While they increase efficiency, they also raise concerns about volatility control, speculative behaviour, and systemic risk.