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Journalism of Courage
Securities and Exchange Board of India (SEBI) Chairman Tuhin Kanta Pandey advised retail investors to avoid speculative futures and options (F&O) trading. Retail investors should assess their risk capacity before trading in the derivatives market, he said Monday.
Despite various measures announced by the markets regulator to curb speculative trading in derivatives markets, retail investors continue to be attracted to F&O trading in hopes of quick profits, but often end up incurring significant losses. Multiple studies by the market regulator has shown that retail traders lost over Rs 1 lakh crore in F&O market in the fiscal year ended 2025.
SEBI Chairman on Monday (October 6) said that retail investors often incur losses in the derivatives market, and therefore should evaluate their risks and avoid speculative trading.
“SEBI studies have consistently shown that retail investors trading in derivatives end up facing losses, often because they do not fully understand the risk in these products,” SEBI Chairman Tuhin Kanta Pandey said Monday. F&O are derivative instruments, or financial contracts whose value is based on the performance of an underlying asset. Rather than owning a stock or commodity, traders place bets on how its price will move in the future.
“Derivatives are meant for hedging and risk management, not for quick gains. Retail investors should therefore assess their risk capacity, learn how these contracts work, and avoid speculative trades,” he said.
Individuals should examine whether they seek to build long-term wealth or want to engage in speculative, short-term trading, Pandey said. SEBI has been warning retail investors against participating in the derivatives market as many of them have made heavy losses.
A recent study conducted by SEBI showed that In FY25, retail traders lost a record Rs 1.06 lakh crore, a 41 per cent jump from Rs 74,812 crore the previous year. A massive 91 per cent of individual traders suffered net losses, a figure that has barely changed year-over-year.
This data was from an analysis of 96 lakh traders registered with the country’s top 13 brokers. Interestingly, retail participation had fallen sharply — from 61.4 lakh in Q1 to just 42.7 lakh in Q4 of FY25 — after SEBI introduced tighter rules in November 2024 to curb speculative excesses.
Another SEBI study conducted in 2023 revealed that as many as 89 per cent of the individual traders — 9 out of 10 individual traders — in the equity F&O segment incurred losses with an average loss of Rs 1.1 lakh during FY22.
Retail investors often enter the F&O market seeking quick returns. Most of them entered the market during the Covid period, attracted by easy online access and low entry barriers.
“In pursuit of quick gains, retail investors often engage in excessive trading in futures and options without proper strategy or discipline. Transaction costs, brokerage, and time decay in options further eat into returns,” said Narinder Wadhwa, Managing Director and CEO, Ski Capital Services Ltd.
Additionally, attempting to time the market or trade based on short-term speculation, rather than informed analysis, frequently leads to consistent losses,” he said.
“What many don’t realize is that futures and options magnify both gains and losses. Even a small 2–3 per cent move against their position can wipe out a large part of their trading capital,” said Puneet Sharma, CEO and Fund Manager, Whitespace Alpha, a Category III Alternative Investment Fund (AIF).
Many traders buy options that look cheap but expire worthless because the market doesn’t move fast enough. Others sell options for small premiums, not realizing the potential for unlimited losses if the market turns. Add to that the influence of social media ‘tips’, overconfidence after a few early wins, and the emotional swings of fear and greed and losses tend to pile up fast, he said.
For example, a trader with Rs 2 lakh margin might take a position worth Rs 20 lakh through derivatives. A 2 per cent market move against them can erase Rs 40,000 in minutes. This speed and scale of loss are what make F&O dangerous for individuals without proper knowledge or risk control.
The biggest risk lies in leverage. Derivatives allow traders to take exposure far beyond their capital base, which amplifies small price movements into large gains or losses. Most retail participants underestimate how quickly this can turn against them, said Sharma, adding that there is also a knowledge gap.
“Many also trade excessively to recover previous losses, which compounds risks instead of reducing them. Moreover, since options are time sensitive instruments, lack of awareness about time decay (Theta) and implied volatility (Vega) often results in positions losing value even if the market moves in the expected direction,” said Wadhwa.
Experts suggest that retail investors should primarily use derivatives for hedging and not for speculation. They should adopt a disciplined and informed approach before entering the F&O segment.
“The first step is to understand one’s risk appetite and financial goals—derivatives are not suitable for every investor,” said Wadhwa.
Maintaining a strict stop-loss strategy, avoiding over-leverage, and keeping emotions in check are critical for retail investors, he said.
“The right approach is to first invest time in learning how futures and options work — how margins are calculated, how contracts behave with time, and what risks are involved,” said Sharma of Whitespace Alpha.
Only a small portion of one’s portfolio should ever be allocated to F&O, and each trade should be backed by a clear rationale, stop-loss, and defined risk limit, he added.
