As SEBI Prepares To Tighten Rules, Retail Options Traders Bemoan Losses

Vikram Bhagwan, a 40-year old businessman based in Chandigarh, started investing in futures and options during the Covid-19 pandemic to create an alternative source of wealth in a time when his business was nearly "shut" due to lockdown.

Instead, he ended up making consistent losses in the following 18 months.

"Once, I had lost up to Rs 4.5 lakh in a day, and it took me at least five months to recover this loss," said Bhagwan, adding that this was due to lack of knowledge.

Bhagwan's story is one of many such retail traders who have burnt their hands in the F&O market. Nine out of 10 F&O traders incurred losses of around Rs 2 lakh on an average, according to the latest data by Securities and Exchange Board of India.

Over 93% retail investors lost money in F&O in three years. Overall share of loss-making traders rose to 91.1% in fiscal ending March 2024 from 89% two years ago, according to the regulator.

Om Prakash Singh, a teacher living in Bihar, also started F&O trading during the pandemic. He lost his entire capital of Rs 50,000 within four days. To recover from such losses, he invested again, only leading to more losses.

"Now I will never invest money in F&O, and will neither recommend it to anyone who is investing in it," he added.

Aman Dhall, an entrepreneur and F&O trader spoke about how he has earned and lost money over the years in speculative trades.

"...cumulatively, I lost around Rs 3 lakh during 2008-09 and again Rs 5 lakh between 2014-16. At one point, I made Rs 5 lakh, but ended up losing Rs 8 lakh overall," Dhall said.

"Like many middle-class professionals, I also wanted to attract alternative income to the current income flow. I believed I understood the market," he said. "But as I look back, I see that it was a classic case of following the herd, a sheer lack of knowledge."

Recounting a similar experience in F&O trading, Lalan Yadav, a civil contractor, said, "I started with Rs 15,000 but as I began to lose, I invested more to recover my losses. My investments eventually reached Rs 2 lakh, since then I have been too scared to touch it again".

SEBI's latest data has sparked discussions around 'herd mentality' and 'gambling intent' of traders and inpromptu trades to avail quicker returns. The data has also brought up the need for stringent regulations around F&O trading for retail investors.

Meanwhile, both investors and experts uphold the view that traders should be allowed to trade in derivatives only if they are "capable" or "educated enough".

They believe that not only should tighter curbs be brought in for F&O trading, financial education and professional training should also be encouraged before such retail investor foray into the derivatives.

Ruchit Jain, lead research analyst, at 5paisa said that there should definitely be more curbs on F&O, especially considering the the high volumes currently being traded. He said that more educational drives should be conducted, especially about what risks should be taken care of when trading in F&O.

Rajesh Palviya, senior vice-president (research) and technical and derivatives head at Axis Securities, is also of the view that an examination should be conducted to assess investors' understanding of the market. Only then, the investors should be allowed to participate in the F&O market, he added.

"SEBI should ensure that retail investors are better educated before entering the F&O space, perhaps by requiring formal training or exams, and should encourage hedging over speculation," concurred Gaurav Goel, entrepreneur and investor, who is also a SEBI-registered investment advisor.

Participants also believe that checks related to net worth, age, risk profile should be established by the regulator to curb losses made in futures and options trading. Investors also hope that regulators will curb misleading promotions that lure people into derivatives without fully understanding the risks.

Further, "self-discipline in investors and brokerage houses is extremely important. And if this not done, then SEBI will have to come up with very harsh penalties on mis-selling", said market expert Sunil Subramaniam.

It is important to have a net worth, age, criteria, but if you are too harsh on this, it will further promote such unorganised trading, market expert Ajay Bagga told NDTV Profit.

"...we can identity such companies (encouraging investors to invest in F&O) and take action. But if we will stop the entry of such investors in the market, you are going to further push them into dabba trading or ponzi schemes that are also proliferating no matter how strong is the regulator," Bagga added.

As far as the regulator is concerned, SEBI is scheduled to hold its board meeting on Monday, and it is expected to approve tighter trading regulations for derivatives.

SEBI also plans to raise margins closer to contract expiry, increasing the extreme loss margin by 3% the day before and 5% on expiry day. It also suggests removing the calendar spread benefit on expiry day and increasing margins for near-term expiries while establishing guidelines for options strikes.

In its consultation paper released in July, the regulator had proposed measures such as increasing the minimum size of F&O contracts, collection of option premiums upfront, intraday monitoring of position limits, increasing near contract expiry margin, removal of calendar spread benefit, and rationalisation of strike prices.