{"id":125286,"date":"2024-08-31T21:52:16","date_gmt":"2024-08-31T21:52:16","guid":{"rendered":"https:\/\/news.talkwithrattan.com\/index.php\/2024\/08\/31\/futures-options-and-financial-ruin-inside-indias-fo-trading-craze\/"},"modified":"2024-08-31T21:52:16","modified_gmt":"2024-08-31T21:52:16","slug":"futures-options-and-financial-ruin-inside-indias-fo-trading-craze","status":"publish","type":"post","link":"https:\/\/news.talkwithrattan.com\/index.php\/2024\/08\/31\/futures-options-and-financial-ruin-inside-indias-fo-trading-craze\/","title":{"rendered":"Futures, options, and financial ruin: Inside India’s F&O trading craze"},"content":{"rendered":"
\"Futures,<\/div>


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When Vinay Sharma, 36, started trading options in August 2023, he was stunned by \u201chow easy it was to make money\u201d. T he rookie trader would earn up to Rs 1 lakh on good days and lose as much on bad ones. But net-net, this Bengaluru-based techie\u2019s account would be in the green at the end of the month. \u201cIt was hard to believe, especially because I had no experience and had only started trading after Covid,\u201d says the Jharkhand-based IT professional, who was trading on the advice of influencers\u2014called finfluencers\u2014on YouTube and advisors on Telegram channels.<\/p>\n

Trading quickly became a habit, and Sharma soon felt his dream of achieving financial independence\u2014generating a corpus of Rs 1 crore\u2014was getting closer to reality.<\/p>\n

But today, Sharma\u2019s account is bleeding red, having racked up losses of Rs 60 lakh, roughly equal to his annual salary. Meanwhile, the habit that started as a cool hobby has now turned into pure addiction. \u201cI just can\u2019t stop! I know I should stop trading for the day if it is not going according to my plan. I know the game is rigged, that most traders lose money… I have all the wisdom, but I am not able to turn my eyes away from the computer screen. I\u2019m addicted to it now like a moth to the flame,\u201d says Sharma, who is the sole breadwinner in his family of five. <\/p>\n

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PLAYING WITH FUTURES
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Sharma is among the millions of amateur Indian traders who have ventured into the risky futures and options (F&O) segment of the equity markets, hitherto reserved for professionals. The lure of making quick money\u2014sometimes in minutes\u2014 means many see these derivatives as online casinos. India is now the world\u2019s largest and fastest-growing equity derivatives market, with NSE boasting a 97% global share in terms of contracts traded in the index options segment. Cheap internet, greater penetration of smartphones, rise of finfluencers and the introduction of shorter-term contracts are some of the reasons behind the retail options mania, say industry experts.<\/p>\n

Options are contracts that give a trader the right, but not the obligation, to buy\/sell a stock or index at a set price by a specific date. The buyer is also allowed to exit their position before the contract expires if the outcome is not in their favour. Futures is a similar financial instrument, with one big difference: the buyer and the seller must execute the contract on the pre-decided date.<\/p>\n

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Both are sophisticated financial tools meant to be used by professionals to hedge their positions. But retail traders are now using it mostly for speculation in what can be described as gambling-style trading\u2014and losing.In FY24, 9.25 million investors incurred a loss of Rs 51,689 crore while trading in the index derivatives segment of NSE, according to a Sebi consultation paper released in July. Total loss including transaction costs \u2014 which is an additional 23%, or Rs 11,888 crore \u2014 goes up to Rs 63,577 crore.<\/p>\n

\u2018TRADING MAKES ME FEEL ALIVE\u2019
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Constant reminders by the regulators and the government that 9 out of 10 traders lose money in such transactions do not seem to have much impact. For Rohan Singh, 26, trading is not about making money. \u201cI just do it for the thrill. Startups are not what they used to be. We are overworked and underpaid\u2026 trading makes me feel alive,\u201d says the software engineer, who works for a startup in India\u2019s IT capital. <\/p>\n

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Rohit Barua, a 35-year-old director in the TV industry in Mumbai, agrees that F&O play is like gambling, but avers that he isn\u2019t addicted to it. \u201cIt\u2019s a lot of fun but I don\u2019t have the time to do it every day.\u201d The last time he was extremely bullish on the Bank Nifty index, he scooped up some call options that were expiring on the same day and tripled his money in under an hour. \u201cThere\u2019s no other place on Earth where you can do that, except the casino. And F&O is a casino on steroids.\u201d<\/p>\n

Indore-based Tanmay Sathe holds call options for an average of five minutes. \u201cI play small, usually with only one lot, and exit as soon as I make 50-70% on it,\u201d says the sales professional, who is otherwise financially conservative with about 70% of his portfolio invested in digital gold. According to the Sebi paper, retail investors\u2019 average holding period is around 30 minutes, and expiry-day trading constitutes as high as 80-90% of overall notional turnover of the option in expiry week. Expiry-day trade refers to buying or selling contracts that are expiring the same day.<\/p>\n

GAMBLERS\u2019 PARADISE
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The embedded leverage in options makes it a gambling ground, says Ashish Gupta, chief investment officer, Axis Mutual Fund. \u201cYour payoff matrix looks very attractive. With a Rs 50 bet, you are gaining exposure to an index with notional value of, say, Rs 6-7 lakh. So theoretically if you have a favourable movement of even 1% during the day, you stand to make a very large percentage of your initial investment.\u201d The effective leverage on an index option during expiry day is 500x, according to a report by Gupta, titled \u201cGamification of Indian Equities\u201d. \u201cAlso, the feedback is quick: you place the bet at 2 pm and at 3.30 pm you know what the outcome is,\u201d says Gupta, adding that the lure of outsized gains makes it a lot like buying lottery tickets. Not everyone agrees F&O is a menace to be dealt with.<\/p>\n

Sudhakara Reddy, associate professor of finance at IIM-Calcutta, balks at the vilification of F&O. He agrees that it is similar to the lottery but points to the big picture.<\/p>\n

\u201cLottery inherently means small-sized bets. So even if the retail traders are losing, they are losing small. I don\u2019t see that as a big problem or a s y s t e m i c threat.\u201d He says since most retail traders are buyers of options and not sellers, their risk is limited. \u201cIt\u2019s the sellers who have unlimited risk and they are the ones who move the markets.\u201d A spokesperson for Zerodha Broking Ltd says to curb the speculation in the F&O segment, a \u201cproduct suitability framework could be introduced\u201d, which will make it harder for non-serious people to trade. \u201cThis means making it mandatory for traders to demonstrate their net worth and experience in the market before being allowed to trade in the F&O segment.<\/p>\n

Zerodha has introduced a few features, such as the kill switch, to encourage traders to take a break if they go through a loss-making streak . \u201cAdditionally, the ( Sebi ) consultation paper suggests restricting the number of weekly expiries to one per exchange. This will reduce the surge in market activity,\u201d says the Zerodha spokesperson.<\/p>\n

WITHDRAWAL SYMPTOMS
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ET spoke to dozens of amateur traders who all had similar stories to share. It started with small bets and, at some point, they got hooked to the game. While a Hyderabad-based scriptwriter borrowed money from friends and family to trade and lost it all, a cab driver in Thane says his habit start ed affecting his work. Almost all agree that they were speculating and gambling. \u201cI initially lost sleep from excitement and now I can\u2019t sleep because of my losses,\u201d says another trader. Many of them say they believed they could make the money back if only they found the right strategy, which led them to overtrade.<\/p>\n

Hyderabad-based trader Murali Vijay has been dabbling in options for the past 13 years and claims to have lost Rs 1 crore. Vijay recalls feeling agitated on weekends when the markets are shut. \u201cI would pick up fights with my wife for no reason. I couldn\u2019t wait for the break to be over and for the markets to open Monday.\u201d Vijay took the \u201cdifficult, but necessary\u201d decision to shut his trading account two months back. \u201cMy problem was overtrading. You can have all the knowledge in the world but if you don\u2019t have the discipline, you will never make money in options.\u201d Throwing good money after bad is another trait that makes F&O a gambling-like activity, say psychiatrists. \u201cStarting 2019, we have seen a subset of people who come in complaining about their excessive stock trading in a way that mimics gambling. The magnitude of losses is huge. There\u2019s a case I came across where a person lost `1.5 crore,\u201d says Dr Jayant Mahadevan, assistant professor of psychiatry, Centre for Addiction Medicine, National Institute of Mental Health and Neurosciences, Bengaluru.<\/p>\n

He points to the ecosystem that enables this habit. \u201cFor instance, it is easier to seek out loans and keep on trading.\u201d Those who could develop this habit are impulsive people, those who have a need for reward, those who seek out thrill and have a high risk appetite, says Mahadevan, who suggests identifying these behaviours early on and seeking treatment. Sharma, the Jharkhand-based trader, doesn\u2019t believe in seeking help and that\u2019s probably why he hasn\u2019t been able to stop even after a loss of Rs 60 lakh. \u201cI will stop the day I make that Rs 1 crore,\u201d he says, even as he admits he is hoping against hope. Addictive behaviour, did you say?<\/p>\n

(Some names have been changed on request)<\/em>
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When Vinay Sharma, 36, started trading options in August 2023, he was stunned by \u201chow easy it was to make money\u201d. T he rookie trader would earn up to Rs 1 lakh on good days and lose as much on bad ones. But net-net, this Bengaluru-based techie\u2019s account would be in the green at the […]<\/p>\n","protected":false},"author":2,"featured_media":125287,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"tdm_status":"","tdm_grid_status":"","fifu_image_url":"https:\/\/img.etimg.com\/photo\/msid-42031747\/et-logo.jpg","fifu_image_alt":"","footnotes":""},"categories":[602],"tags":[101517,67253,101516,101513,101514,101515,4073,11632,925,9891,24520,5499],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/posts\/125286"}],"collection":[{"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/comments?post=125286"}],"version-history":[{"count":1,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/posts\/125286\/revisions"}],"predecessor-version":[{"id":125288,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/posts\/125286\/revisions\/125288"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/media\/125287"}],"wp:attachment":[{"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/media?parent=125286"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/categories?post=125286"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/news.talkwithrattan.com\/index.php\/wp-json\/wp\/v2\/tags?post=125286"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}