Retail investors of late have been active in Futures and Options (F&O) trading. F&O average daily turnover has increased 34.5 times over the last 5 years (from Rs. 9.59 trillion to Rs. 331.2 trillion), but cash volumes have barely doubled (from Rs. 0.35 trillion to Rs. 0.73 trillion).
First and foremost, what is this F&O segment? Similar to stocks, the NSE and BSE include sectors for investing in and trading futures and options (also known as derivatives). Market players can buy and sell shares in the capital markets or cash segments, as well as hedge or simply speculate on the derivatives segment, which gets its value from the cash segment’s underlying shares or indexes. To purchase and sell shares, an investor must put up the entire amount, but trading on the F&O section requires only a percentage (and this is called margin trading). In the last five years, retail investors have grown more interested in index options based on the Nifty and Bank Nifty (due to the trading margins provided by the brokerage houses).
The Securities and Exchange Board of India (SEBI) is concerned about the increase in option volumes notwithstanding massive losses incurred by the retail investors. Its study suggests that nine out of ten investors lose money while trading options, with an average loss of Rs. 50,000. In addition, loss-makers incurred transaction expenses totalling 28% of net trading losses. Those that made net trading profits paid between 15% and 50% of their profits in transaction charges.
Notwithstanding this, the average daily turnover of F&O, mostly options, on the NSE and BSE has increased multi-fold from FY19 to FY24, despite a minor increase in cash volumes. Index options’ turnover accounts for 98.5% of the total. The mania has been fuelled by weekly index options, which expire every day of the week. Retail traders lack the experience and equipment to trade, whereas more knowledgeable institutional traders utilize algorithms and robots to place their trades, and hence have the advantage over retail traders.
While participation in F&O cannot be prohibited by the regulator SEBI, they can increase the margins to trade the F&O segment and impose a severe minimum net worth requirement for trading in F&O. At present, an options buyer pays a far lower price than a futures buyer. Higher margins may cause purchasers to pay more, discouraging many retail traders from entering the F&O market for speculation.
