Navigating the Treacherous Terrain of Futures and Options Trading: A Cautionary Tale for Retail Investors

Abhimanyu Sharma, a 35-year-old media professional from Delhi, always felt the pull of the stock market. With a family legacy of long-term investors, he was drawn to the idea of accelerating returns through Futures and Options (F&O) trading. Little did he know that this goal would lead him down a dangerous path, a path that has ensnared millions of retail investors seeking quick profits.

Chasing the Mirage of Outsized Gains: The Allure of Futures and Options Trading

The Siren Call of Leverage and Potential Profits

Futures and Options are financial instruments that allow traders to speculate on future stock or index prices. Their appeal lies in leverage—the ability to control large positions with relatively small capital. This leverage can amplify profits, but it also magnifies losses. While F&O trading applies to commodities, currencies, and other assets, this article specifically highlights the equities derivatives segment.Chirag Gupta, another 35-year-old investor from Mathura, shares a similar introduction to F&O trading. "When I was introduced to the F&O segment by a friend who had been trading for some time, he first told me how much money he was making," Chirag remembers. "The way he explained it is that with F&O, you can actually buy more stocks for a lesser investment, which prompted me further. I thought, 'If he can make money this way, maybe I can too!'"This sentiment is echoed by Abhinay Singh, a 28-year-old from Mumbai, who ventured into the risky trading segment for the "possibility of high returns." He admits, "I was not even aware about the actual things that these markets depend on. I don't think most of the players do understand that, maybe that is the reason for around 90% people making loss in it."

The Seductive Allure of "Beginner's Luck"

Both Abhimanyu and Chirag experienced early success, often referred to as 'beginner's luck'. The unexpected success is what attracts most investors to invest more. Abhimanyu's first trade on a Bank Nifty weekly expiry turned Rs 3,000 into Rs 30,000 within half an hour. By the end of the day, he had transformed this into a staggering Rs 8.75 lakh.Chirag had a similar experience. "Man, that high while doing the first trade was fantastic!" he exclaims. "In the very first go, I made a profit of around Rs 12,000 and made more profits after that. But I never thought that the market was volatile, and I could lose my money."

The Gambler's Grip: The Addictive Nature of F&O Trading

Despite the high likelihood of losses, many traders find it hard to stop. The Sebi study reveals that over 75% of loss-making traders continued trading in F&O, even after facing consecutive years of setbacks. Puneet Sharma, CEO and Fund Manager at Whitespace Alpha, likens this behaviour to gambling addiction. "Like gambling, trading F&O can trigger an emotional response that is addictive, with traders continuing to place bets in the hope of recovering losses," he explains.Cognitive biases, such as the gambler's fallacy and overconfidence bias, further fuel this addiction. Sujit Modi, Chief Investment Officer at Share.Market, describes F&O as a "zero-sum game" where there can only be one winner, and the inherent leverage built into the product makes it one of the riskiest instruments for making money.

The Devastating Consequences of F&O Losses

Abhimanyu's story took a similar turn. Riding high on success, he invested his entire Rs 8.75 lakh in an OTM (Out of the money) Bank Nifty put option. As the market turned against him, and he tried to exit his position, he encountered a technical glitch. "My entire profit vanished in 7 mins, and it all became ZERO!" he recalls.These losses are not unique. As mentioned earlier, over one crore traders lost a staggering Rs 1.81 lakh crore in the F&O segment between FY22 and FY24. Alarmingly, 93% of individual traders lost money, with an average loss of Rs 2 lakh per trader. Sebi also highlighted that the proportion of young traders (below 30 years) in the F&O segment rose from 31% in FY23 to 43% in FY24.

The Lure of Easy Money and the Perils of Debt

In June, Sebi chairperson Madhabi Puri Buch issued a stark warning, saying the markets regulator had anecdotal evidence that retail investors were borrowing money — sometimes even mortgaging their parents' homes — to place speculative bets in the derivatives segment. She added that household savings were increasingly being funnelled into risky trading practices like Futures & Options (F&O), which, according to Sebi research, results in losses for nine out of 10 retail investors.Chartered Accountant Roshan Agarwal's account provides a stark example of this risk. He spoke about a third-year BTech student who lost Rs 46 lakh in F&O trades, despite having no regular income. The student had already lost Rs 20 lakh the previous year but continued trading, funding his addiction through personal loans, borrowing money from friends, and even secretly using his parents' funds.

The Role of Financial Influencers in Fueling the F&O Frenzy

Whitespace Alpha's Puneet Sharma believes stricter regulations on these finfluencers could help protect new traders. "Tighter regulations on financial influencers, or finfluencers, would likely reduce the influx of inexperienced traders into the derivatives market. Many retail investors are drawn into F&O trading through content created by influencers who may oversimplify the risks or promote speculative trading strategies without fully disclosing the potential downsides," Sharma told India Today Digital.Tarun Singh, Founder & MD of Highbrow Securities, echoes this sentiment, stating that "Enhancing margin requirements, improving disclosure, and boosting financial literacy are crucial" to address the concerning trends in the F&O market.

Navigating the Treacherous Terrain: Lessons from Experienced Traders

Today, both Abhimanyu and Chirag have sobering messages for aspiring F&O traders. "If one really wants to do it, they should not treat it lightly. They should test themselves with the tiniest of trade for at least one full year," advises Abhimanyu.Chirag echoes this sentiment. "Now I understand how to trade on F&O, but the market is volatile. If you enter into it, please take a check because profit is so luring while loss is frustrating."Abhinay, the Mumbai-based trader, emphasizes the importance of self-awareness and education. "People should not go with F&O trading based on someone's advice. We should try to be more aware of the nuances of the trading in F&O," he says.

The Path Forward: Balancing Opportunity and Risk in F&O Trading

While the risks of F&O trading are significant, experts argue that the issue lies not with the instruments themselves but with the lack of awareness and education among retail investors. Tarun Singh explains, "Both complexity and lack of education significantly contribute to high F&O losses, but lack of experience plays an even more crucial role."Ravi Singh, Senior Vice President of Retail Research at Religare Broking Limited, adds, "F&O trading has gained widespread appeal among retail investors due to its potential for high returns and leverage. While the potential to generate profits in F&O is immense, the risks are equally significant, especially for inexperienced individuals."Supriya Dedgaonkar, a 29-year-old from Pune, highlights the importance of a well-rounded education for complex financial products. "I was new to Fintech… after reading a lot, I couldn't decode the concept and thought of trying my hand at it. My first trade was random; I bought the first option I saw, and to my luck, I ended up in green for that particular trade." However, she acknowledged that it was a complete DIY journey for her and after spending years trading, she still feels "like a newbie as there's so much to learn."Lemon's business head, Devam Sardana, calls for the need for more education and awareness about the F&O segment. "There needs to be a lot more done in the domain of investor education on such non-linear products like F&O," he notes.Puneet Sharma from Whitespace Alpha highlights the current F&O trading landscape as a blend of speculation and the emergence of more sophisticated strategies among retail traders. "The growing participation in F&O is a mix of both speculative culture and a gradual shift toward more sophisticated investment strategies," he explains, warning that speculation is currently driving much of the surge.In the risky world of F&O trading, the thrill of making fast money can swiftly turn into a nightmare of debt and lost dreams. Many investors dive in without fully understanding the implications, which can lead to serious trouble. The bottomline isn't one of despair but of cautious hope. With proper education and smart strategies, F&O trading can become a useful tool rather than a dangerous gamble. As new regulations come into play, it's up to each investor to prioritize learning and stay aware of the risks.The big question to ask yourself is — Will you tread carefully in this treacherous market, or will you become just another statistic in a game where most people end up as losers?