SEBI released a new study on the Profit and Loss of Individuals in the Equity Derivatives segment for FY22 and FY24. The study found a baffling P&L pattern in the individual category. Almost 9 out of 10 Individual investors made losses in derivatives. It was also found that 99.8% of the Future and Option traders are individuals.

Since introducing the derivatives market, India has evolved into one of the world's largest and most liquid derivatives markets, with products like stock futures, stock options and Index options. In recent years there has been a rise in algorithmic trading and increased participation of individual retail investors. The number of individual traders has almost doubled from FY22 to FY24.  This has increased the liquidity of the market as well as speculation. The increase in individual or retail traders can be attributed to the availability of sophisticated trading platforms and lower transaction costs.

However, the study shows that only 1 per cent of individual traders were able to cash in a profit excess of 1 lakh between FY22-FY24.  During that period around 1.13 crore traders faced an aggregate loss of 1.81 lakh crore in F&O. In FY24 alone, individuals incurred around 75k crore in net loss. The top 3.5% of loss-makers incurred an average loss of 28 lakh per trader. Despite consecutive losses, 75% of traders continued trading in F&O.

The FPI and propriety traders made a gross profit of 33,000 crore. The majority of them were made by algorithm-driven entities. 97% of FPI profit and 97% of propriety trading profit were made by these algorithm traders.

What are Future and Option Trading

Future and Option are contracts that are signed by investors which allow them to purchase the stock at a later date. For example, a stock is priced at Rs.100 today and you predict a surge to Rs.120 in the following month. In that case, if you buy a Future Stock Derivative now, you are obliged to purchase the stock at Rs 100 irrespective of a surge or fall in the price of the stock in the following month, and then you can sell it at its most recent value. Similarly in option, you have the option to purchase the stock at a later date, but you are not obliged to do so. On the offset, this may look easier but the cumulative purchase of Option Stock Derivatives without owning the stock may lead to massive loss. Futures and Options are risky as predicting a surge or fall in stock prices is a tremendous task, successfully predicting the surge or fall will lead to massive gains whereas successive failure in the prediction will lead to even bigger losses.

SEBI is considering tightening the regulation around trading of Futures and Options Derivatives to minimize the loss. The Padmanabhan Committee recommended increasing the entry barrier of minimum lot size of derivative contract from Rs 5-10 lakh to Rs 15-20 lakh at introduction and Rs 25-30 lakh after six months with one expiry per week per exchange instead of the current five; increasing margins to trade a day before and on expiry days of options; rationalizing option stock prices; collecting upfront margins from option buyers; removal of calendar spread benefit on expiry day; and intraday monitoring of position limits.