Retail traders are increasingly diving into futures and options (F&O) trading, lured by the promise of quick profits. Experts say the speculative nature of F&O is attracting many investors, but they urge caution. They recommend that investors understand the risks and manage them carefully.
Warnings from Financial Authorities
Finance Minister Nirmala Sitharaman and Chief Economic Advisor V. Anantha Nageswaran recently highlighted the risks of F&O trading for retail investors. In November 2023, SEBI Chief Madhabi Puri Buch also warned against heavy betting on F&O.
These warnings aim to encourage smarter and safer trading practices. The goal is to protect investors’ finances while still allowing them to benefit from market opportunities.
Despite these warnings, F&O trading is becoming more popular. The potential for profit and increasing trading volumes are key drivers.
Growth
The F&O segment has seen massive growth. Monthly turnover reached Rs 8,740 lakh crore in March 2024, compared to Rs 217 lakh crore in March 2019. The average daily turnover in the equity cash segment was Rs 1 lakh crore, while the F&O segment had an average daily turnover of about Rs 330 lakh crore, according to Vinnaayak Mehta, Founder and Director of wealth management firm The Infinity Group. Mehta noted that while many use F&O for quick profits, most retail investors end up losing money. A SEBI study showed that 89% of individual traders in the equity F&O segment lost money, with average losses of Rs 1.1 lakh in FY22.
Participation in F&O trading surged during the pandemic. The number of unique individual traders grew by over 500%, from 7.1 lakh in FY19 to 45.24 lakh in FY21, according to the SEBI study.
“F&O trading can be good for hedging and speculation, but it carries higher risks because of leverage. Retail investors need to understand these instruments and their risks before jumping in,” said Tejas Khoday, co-founder and CEO of trading platform FYERS.
Pradeep Gupta, co-founder and vice-chairman of Anand Rathi Group, explained that minimal capital requirements and weekly expiries of indices like Nifty and Bank Nifty have led to a surge in participation. This has increased speculation and the associated risks for retail investors.
In the fiscal year 2023-24, the notional value of index options traded on the National Stock Exchange (NSE) doubled to USD 907.09 trillion from USD 447.69 trillion the previous year.
Futures and Options (F&O)
Futures and Options (F&O) trading involves contracts based on an underlying asset, like stocks or commodities. Futures contracts require buyers and sellers to transact at a future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.
These instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, such as leverage risk and market volatility, which can lead to large losses.
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