Markets
Mint Primer: When the tail wags the dog: Futures options
Summary
- The rise in options volumes despite huge losses faced by retail investor has Sebi worried
Retail investors have been at it. Futures and options (F&O) average daily turnover (ADT) has surged 34.5 times from FY19-24, while cash volumes only doubled, prompting deep concern from the Sebi chairperson. Brokers now expect more curbs to rein in the frenzy:
What is the F&O segment?
NSE and BSE offer segments for investing and trading, like capital markets, equities futures and options, currencies, commodities etc. Market participants can buy and sell shares on the capital markets or cash segment and hedge or simply punt on the derivatives segment, which derives its value from the underlying shares or indices on the cash segment. A participant must put up the whole sum to buy and sell shares, but only a fraction to trade on the F&O segment. Relatively cheap index options, based on Nifty and Bank Nifty, have become hugely popular among retail investors in the past three years.
What is the concern on F&O trading?
The rise in options volumes despite huge losses faced by retail investor has the Securities and Exchange Board of India (Sebi) worried. Its research shows that nine out of 10 investors lose money trading options, and the average loss is ₹50,000. Despite this, the ADT of F&O, largely options, on NSE and BSE has risen manifold from FY19-FY24 (Apr-Nov) against a modest gain in cash volumes. The craze has been fuelled by weekly index options with an expiry every day of week. Retail lacks the expertise and the tools to trade, unlike better-informed proprietary traders who use algorithms to trade.
What curbs could be placed on punting?
While participation can’t be restricted, margins to trade can be hiked and a minimum net worth criteria laid down for F&O. Currently, an options buyer pays a fraction of what a futures buyer pays. For eg, a weekly 19,900-call options contract costs just ₹872, against over a lakh for a Nifty futures contract. Higher margins could result in buyers shelling out more.
Are there any curbs currently?
Only risk disclosures. A client logging into their trading account with a broker cannot proceed without ticking a pop-up box with Sebi-mandated risk disclosures. These state that 9 out of 10 individual traders in equities futures and options segment incurred net losses. On an average, net losses are close to ₹50,000. Over and above this, loss-makers expended an additional 28% of net trading losses as transaction costs. Those making net trading profits incurred between 15% and 50% of such profits as transaction costs.
Have these risk disclosures helped?
Going by the spike in F&O turnover they haven’t. Data shows that the notional turnover (market value) of F&O in FY24, so far, has outstripped last fiscal’s turnover. In the eight months of the current fiscal (Apr-Nov) it totals ₹45,452 trillion, up 19% from FY23’s ₹38,223 trillion. Index options’ turnover makes up 98.5% of the total. The turnover has in fact spiked over the past two fiscals which coincided with the covid-induced countrywide lockdown, which also saw the Nifty rise 12% to 19,812.
