F&O segment on Zerodha

The Futures and Options (F&O) segment on Zerodha covers exchange-traded equity derivatives on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). This segment includes index futures, index options, stock futures, and stock options on SEBI-approved underlying securities. Zerodha is among India’s largest F&O brokers by volume, with the segment accounting for a substantial share of its brokerage revenue despite the flat-fee model.

All F&O contracts in India are cash-settled, meaning no physical delivery of shares occurs except in the case of stock futures and stock options contracts in their expiry month, which were mandatorily moved to physical settlement by SEBI in a phased manner beginning in 2018.

Regulatory framework

SEBI oversight of derivatives

SEBI regulates equity derivatives under the Securities Contracts (Regulation) Act, 1956 (SCRA) and the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Specific derivative product approvals are granted by SEBI under Section 18A of SCRA, which recognised exchange-traded derivatives as valid contracts in 2000, enabling the launch of NSE’s Derivatives Market.

SEBI’s circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/134 (2023) revised position limits for various classes of participants including proprietary traders, mutual funds, and foreign portfolio investors (FPIs). Position limits define the maximum open interest any single entity can hold in a derivative contract.

Physical settlement mandate

SEBI issued Circular SEBI/HO/MRD/DP/CIR/P/2018/167 mandating physical settlement for stock derivatives. Under this framework:

• All stock futures and stock options in the final week of their expiry month require physical delivery of shares.
• Clients who hold in-the-money (ITM) stock options into expiry receive or deliver the underlying shares.
• The delivery obligation is calculated based on the delta-equivalent position.

Zerodha proactively closes (auto-squares off) positions in physical-settlement contracts in the last two to three trading days before expiry to protect clients from unexpected delivery obligations. Clients who wish to take or give delivery must explicitly inform Zerodha’s RMS team.

Products and exchanges

NSE offers the following F&O products accessible through Zerodha:

• Index futures: Nifty 50, Nifty Bank, Nifty Financial Services, Nifty Midcap Select, Nifty Next 50.
• Index options: Weekly and monthly expiry contracts on Nifty 50 and Nifty Bank; monthly for other indices.
• Stock futures: Approximately 190 SEBI-approved single-stock futures with monthly expiries.
• Stock options: European-style options on approximately 190 approved stocks.

BSE offers Sensex, Bankex, and limited single-stock derivatives. Zerodha supports BSE F&O through Kite.

Product codes in the F&O segment

Kite uses the following product codes for F&O:

NRML (Normal)

NRML is the carry-forward product for F&O. Positions opened under NRML can be held overnight and rolled over across trading sessions until the contract’s expiry date. Full SPAN margin plus Exposure Margin is required. NRML is the standard product for positional traders and hedgers.

MIS (Margin Intraday Square-off)

MIS in F&O provides additional intraday margin by reducing the SPAN margin requirement (Zerodha typically offers approximately 40% of NRML margin for F&O MIS). MIS positions must be squared off within the same trading session. Auto-square-off occurs between 15:20 and 15:30 IST.

MIS is suitable for intraday options and futures traders who do not wish to carry overnight risk. The leverage offered is higher than NRML, but carries the risk of auto-square-off if the client does not close the position manually.

Margin framework

SPAN margin

Standard Portfolio Analysis of Risk (SPAN) margin is the exchange-mandated minimum margin for futures and short options positions. SPAN is a portfolio-based risk calculation methodology developed by the Chicago Mercantile Exchange and adopted by NSE. It computes the worst-case one-day loss across 16 defined risk scenarios (varying combinations of price movement and volatility change) and requires the highest resulting loss to be maintained as margin.

SPAN margin is recalculated by NSE twice daily and can be recalculated intraday during periods of high volatility. Zerodha’s Kite Margin Calculator integrates NSE’s SPAN files to display live margin requirements before order placement.

Exposure margin

In addition to SPAN, exchanges levy an Exposure Margin (also called the Additional Margin) to cushion against residual risks not captured by SPAN. For index futures, the exposure margin is typically 2% of notional value; for stock futures it is 5% or 1.5 times the standard deviation of daily returns (whichever is higher).

Premium margin for options buyers

Long options positions (buying calls or puts) require only the premium amount. There is no SPAN or exposure margin requirement for long options because the maximum loss is limited to the premium paid.

Short options margin

Writing (selling) options requires SPAN plus Exposure Margin similar to futures. This margin is substantially higher than the premium received and reflects the theoretically unlimited loss potential of a short option position.

Margin shortfall penalties

SEBI’s Peak Margin framework, effective from September 2021, requires that peak margin used by a client during the day not exceed the collateral available at the start of the day plus any intraday additions. Shortfalls attract penalties:

• Shortfall below 10%: 0.5% of shortfall per day.
• Shortfall between 10% and 50%: 1% of shortfall per day.
• Shortfall above 50%: 5% of shortfall per day.

Zerodha’s RMS system monitors margins in real time and squares off positions if margins fall below the minimum threshold to avoid exchange-level penalties.

Brokerage and charges

The STT on exercised stock options was clarified by the Finance Ministry in Budget 2023 to apply at 0.125% of the intrinsic value (strike to spot difference) rather than the full contract value, correcting a long-standing ambiguity.

Expiry mechanics

Monthly expiry

Index and stock futures expire on the last Thursday of each month. If the last Thursday is a market holiday, expiry shifts to the preceding Wednesday. Monthly expiry contracts are identified by their expiry code (e.g., NIFTY25MAYFUT).

Weekly expiry

Weekly index options were introduced by NSE for Nifty 50 (2016) and Nifty Bank (2019). Each week, one new weekly contract is introduced expiring on Thursday. The monthly contract is the fourth week’s Thursday.

SEBI’s circular SEBI/HO/MRD/DP/P/CIR/2023/140 restricted weekly index option contracts to one per exchange per week to reduce speculative froth. NSE retained Nifty 50 weekly expiry; Nifty Bank weekly contracts were discontinued. BSE retained Sensex weekly expiry.

Rollover

Futures contracts are typically rolled over before expiry. A rollover involves closing the near-month position and opening an equivalent position in the next-month contract. The cost of rollover includes the brokerage on two order pairs plus the difference in futures price (roll spread). Roll cost is generally lower for index futures than for stock futures due to higher liquidity.

Greeks and Sensibull integration

Zerodha operates Sensibull (through an affiliated entity), an options analytics platform. Sensibull provides:

• Options chain with live Greeks (delta, gamma, theta, vega).
• Strategy builder for multi-leg strategies (iron condor, straddle, strangle, butterfly).
• P&L simulator for changes in spot, volatility, and time.
• Margin calculator for strategy-level SPAN requirements.

Sensibull integrates directly with Kite; strategy orders placed on Sensibull are executed through Kite’s API.

F&O participation eligibility

SEBI’s circular SEBI/HO/MRD/MRD-PoD-1/P/CIR/2023/168 introduced mandatory financial criteria for new F&O participants effective 1 April 2024:

• Minimum declared income of Rs 5 lakh per annum, OR
• Net tangible assets of at least Rs 10 lakh.

Existing clients registered for F&O before 1 April 2024 were grandfathered. New clients must submit a self-declaration confirming the criteria. Zerodha collects this declaration during the F&O activation step of account setup.

Tax treatment

Business income classification

All F&O profits and losses are treated as non-speculative business income under Section 43(5) of the Income Tax Act, 1961. This applies regardless of holding period. Key implications:

• F&O losses can be set off against any other business income, house property income, and other income (except salary) in the same year.
• F&O losses can be carried forward for up to eight assessment years and set off against future business profits.
• F&O income is subject to a 30% or higher effective slab rate for high earners.
• Taxpayers with F&O income must file ITR-3 (not ITR-2).

Turnover calculation for audit

For F&O, turnover for the purpose of tax audit under Section 44AB is computed as the absolute value of all settled profits and losses. The premium received on options written and options turnover are included. If turnover exceeds Rs 10 crore in a financial year, a tax audit by a Chartered Accountant is mandatory.

Advance tax

F&O traders with tax liability exceeding Rs 10,000 must pay advance tax in four instalments. Zerodha’s Console tax P&L report provides scrip-wise realised P&L data useful for advance tax estimation.

Common operational considerations

Auto-square-off near expiry

Zerodha’s RMS team identifies and closes in-the-money and near-the-money positions in physical-settlement stock F&O contracts on the last two trading days before expiry. Clients receive email and SMS notifications. Clients who wish to roll or take delivery must contact the RMS desk before the designated cutoff time.

Basket orders for multi-leg strategies

Multi-leg option strategies (e.g., iron condor, calendar spread) can be placed using Kite’s basket order feature or through Sensibull’s strategy builder. Execution risk (one leg filling before another) exists; Sensibull’s simultaneous basket order reduces but does not eliminate this risk.

Order validity

F&O orders use the following validity types:

• Day: Valid until end of current trading session.
• IOC (Immediate or Cancel): Executed immediately or cancelled; no partial queuing.
• Disclosed Quantity: Allows partial quantity disclosure to the market.

GTT orders are not supported for F&O contracts on Kite.

References

1. SEBI Circular SEBI/HO/MRD/DP/CIR/P/2018/167, Physical settlement of stock derivatives.
2. SEBI Circular SEBI/HO/MRD/MRD-PoD-3/P/CIR/2023/134, Revised F&O position limits.
3. SEBI Circular SEBI/HO/MRD/DP/P/CIR/2023/140, Weekly index option contract restriction.
4. SEBI Circular SEBI/HO/MRD/MRD-PoD-1/P/CIR/2023/168, F&O eligibility criteria.
5. Securities Contracts (Regulation) Act, 1956, Section 18A.
6. Income Tax Act, 1961, Section 43(5) and Section 44AB.
7. NSE SPAN methodology documentation, NSE Derivatives Market.