Friday, Oct 04 2024
Source/Contribution by : NJ Publications
Retail Investor's Dilemma: Should You Dive into Futures & Options Trading?
F&O trading is often romanticized as a quick path to riches, fueled by sensational stories of overnight gains and social media hype. However, the reality is far more complex. There's no guaranteed formula for success in F&O trading, and the risks involved can be substantial. Market conditions, volatility, and individual trading decisions all play a crucial role in determining outcomes.
F&O trading can be a complex and risky endeavor, and it's generally not recommended for retail investors who lack a deep understanding of the underlying concepts and strategies.
A recent study by SEBI found that a staggering nine out of ten individual traders lost money in the F&O segment during FY24. Specifically, the report indicated that 91.1% of individual traders-approximately 73 lakh-incurred losses. This study follows a SEBI report from January 2023, which showed that 89% of individual F&O traders lost money in FY22.
Over the period from FY22 to FY24, an estimated 1.13 crore unique individual traders collectively lost ₹1.81 lakh crore in F&O trading, with FY24 alone accounting for ₹75,000 crore in net losses. Only 7.2% of individual F&O traders reported profits over these three years, and a mere 1% earned more than ₹1 lakh after considering transaction costs.
The addictive nature of derivatives trading is evident in the fact that over 75% of loss-making traders continued to participate even after incurring significant losses in the past two years.
Data from SEBI indicates that the monthly notional value of derivatives traded reached ₹10,923 lakh crore ($130.13 trillion) in August, making it the highest globally. A significant portion of this activity involves options contracts tied to major stock indices like the BSE Sensex and NSE Nifty 50. The volumes of index options on the National Stock Exchange skyrocketed nearly 13-fold, from ₹10.8 lakh crore in FY20 to ₹138 lakh crore in FY24.
Demographically, the report highlighted that half of the F&O traders in FY24 hailed from just four states: Maharashtra (18.8 lakh or 21.7%), Gujarat (10.1 lakh or 11.6%), Uttar Pradesh (9.3 lakh or 10.7%), and Rajasthan (5.4 lakh or 6.2%).
A growing concern is the increasing number of young investors venturing into the high-risk, high-reward world of futures and options trading. As per SEBI report, the participation of traders under 30 years old rose to 43% in FY24, up from 31% in FY23. However, 93% of these young traders reported losses—higher than the overall loss rate of 91.1% in FY24. Additionally, over 75% of individual traders (65.4 lakh) earned less than ₹5 lakh annually in FY24.
The F&O market's exponential growth can be attributed to increased market awareness, better access to financial products, and the influence of "fin-fluencers" on social media platforms. This has led to heightened scrutiny from SEBI, which noted that the rise in derivatives trading had
become a macroeconomic concern as household savings were being diverted toward speculation rather than capital formation.
In response, SEBI has proposed several measures aimed at enhancing investor protection and market stability:
- Increased contract sizes:
The initial recommendation is to raise the contract value from ₹5-10 lakh to ₹15-20 lakh, with a further increase to ₹20-30 lakh after six months. This increase aims to ensure that investors take on suitable risks while participating in the derivatives market.
- Higher margin requirements:
The upfront margin for sellers will be increased to protect investors from extreme market volatility, especially during high-volume trading sessions.
- Reduction of weekly expiries:
SEBI plans to reduce the number of weekly expiries from five to just one per exchange, limiting exchanges to six weekly contracts monthly. This aims to curb speculative trading and mitigate the risks of uncovered options selling.
- Removal of calendar spread benefits:
The practice of using calendar spreads—offsetting positions across different expiries—will be eliminated for contracts expiring on the same day, reducing speculative trading on expiry days.
- Intraday monitoring of position limits:
Starting April 1, 2025, stock exchanges will implement intraday monitoring of position limits for equity index derivatives to ensure that participants do not exceed set limits during trading sessions.
- Upfront collection of premiums:
From February 1, 2025, brokers will be required to collect option premiums upfront, discouraging excessive intraday leverage and ensuring investors have sufficient collateral.
These regulatory changes are particularly significant for retail investors who often engage in derivatives trading. Analysts believe these measures may help stabilize the market by curbing high-frequency trading and speculative behavior. SEBI's recent initiatives reflect a commitment to protecting small investors and upholding market integrity.
Final Thoughts
The misconception that F&O trading can lead to overnight wealth is not only unrealistic but also dangerous. It fosters a mindset that encourages reckless trading and can lead to substantial financial losses. SEBI's findings reveal that individual traders in the F&O market suffered cumulative losses of ₹1.8 lakh crore over the past three years. Despite rising retail participation—especially among younger traders and those in B30 cities—most individuals faced significant losses.
Retail investors should carefully evaluate their financial needs, risk tolerance, and knowledge level before venturing into this complex market. Mutual funds and equity investments may not offer the thrill of short-term gains, but they can be your secret weapon for long-term financial success.
