KOCHI: Nearly 90 per cent of retail investors in Futures & Options (F&O) markets are making losses, as per SEBI’s recent analysis. Despite being originally designed for hedging, F&O has turned into a high-stakes speculative arena, luring many uninitiated traders who often miscalculate the risks involved in such trades.
With easy access to trading apps, aggressive marketing by brokers, and leverage temptations, many investors enter this space without understanding market dynamics, leading to steep losses.
I myself have materially witnessed unsuspecting colleagues of mine, who never bothered to understand the dynamics of F&O trading, lose their hard-earned money. I used to advise them to keep away from F&O as it involves time compulsions unlike in the case of equity trading where though holding capacity is certainly required to play safe.
Why many lose money
There’s a leverage trap in F&O trading, which allows investors to take positions far exceeding their capital, leading to massive losses when trades go wrong.
“Unlike institutional players, retail traders often fail to assess implied volatility, time decay, and strike price selection in options,” one trader told businessbenchmark.news, while explaining the techniques involved in the trading. The lure of quick profits pushes traders to make emotional decisions, leading to irrational trading behaviour.
Initially designed as a risk-management tool, F&O is now dominated by retail speculation rather than genuine hedging by businesses or institutions.
Understanding both sides
Buy side (Going long): Traders bet on a stock or index rising. If the price moves in their favour, they profit, but if not, they lose the entire premium (in options) or face margin calls (in futures).
Sell side (Going short): Traders sell options (writers) expecting the price to stay stagnant or move in the opposite direction. While premiums provide immediate gains, potential losses can be unlimited if the market moves against them.
SEBI’s push to protect retail investors
With losses mounting, SEBI has issued multiple warnings and regulatory interventions:
Investor caution notices: Advising unsophisticated traders to stay away from F&O unless they fully understand the risks.
Tougher margin rules: SEBI increased margin requirements to prevent reckless leverage-driven trading.
Awareness campaigns: Sebi has run educational initiatives to highlight the dangers of high-risk F&O trading.
NSE move that caught BSE off guard
The NSE recently introduced weekly expiries for the Sensex and Bankex F&O contracts, directly challenging BSE’s derivatives segment. This strategic move strengthens NSE’s dominance, as weekly expiries attract more traders due to lower premiums and quick turnover. BSE, which has been trying to revive its F&O segment, was left playing catch-up.
Should F&O be restricted to hedging alone?
While banning speculation is unrealistic, stricter eligibility criteria could ensure only informed traders participate. One alternative could be to allow F&O trading only for investors who demonstrate knowledge via mandatory certification or risk assessment tests. SEBI’s current steps aim at protecting retail investors without stifling market participation, striking a balance between accessibility and caution.
Risk monitoring to be enhanced
SEBI has also been actively working to enhance risk monitoring in the derivatives market. In a recent discussion paper, the regulator proposed stricter margin norms, enhanced disclosures, and real-time risk assessment mechanisms to ensure better oversight of leveraged positions. These measures aim to curb excessive speculation and protect investors, particularly those who may not fully understand the complexities of F&O trading.
The proposals are part of SEBI’s broader efforts to strengthen market stability and safeguard retail participants from unintended financial risks. By tightening regulations and improving risk surveillance, SEBI seeks to reinforce the original purpose of derivatives as hedging instruments rather than tools for excessive speculation.
