Trading on F&O markets leaves a lasting impact on a familiar family
In the digital age, social media platforms like Instagram and Twitter are filled with enticing videos and snaps showing people turning small amounts of money into large sums through F&O trading. However, the reality is far from this illusion of quick and easy profits.
Recently, a close friend of the author lost nearly ₹20 lakh in F&O trading, using leveraged bets. This tragic incident serves as a stark reminder of the risks associated with F&O trading.
The small premium bets, frequent trade prompts, and profit screenshots shown online are designed to pull retail investors in, not to protect them. In fact, retail traders pay significant transaction costs, with over ₹50,000 crore paid in transaction costs over three years.
F&O trading is not investing but speculation, originally designed for hedging risk. However, the system is structurally stacked against retail investors, with institutions and algorithmic systems making most of the profits. Over the last three years, retail losses in F&O have crossed ₹1.8 lakh crore.
The high loss rate for retail traders in F&O trading is primarily due to the complex nature of these instruments. Key factors contributing to high losses include time decay, lack of price movement or low volatility, strike price and moneyness, leverage effect, complexity in managing Greeks, market volatility and sudden movements, and inadequate risk management.
F&O are considered risky for retail investors because they involve leverage, time-sensitive decay, complex pricing dynamics, liquidity issues, and regulatory and margin requirements that can force early liquidation during adverse moves, locking in losses.
SEBI has made brokers show warnings that "9 out of 10 traders lose money in F&O," but tougher rules on how F&O is promoted online, stricter checks on influencers making financial claims, and limits on how aggressively trading apps push risky products are needed.
Influencers on social media often post screenshots of large profits from F&O trading, but rarely show their months of losses or sleepless nights. The author is writing to warn people about the dangers of F&O trading and the difficulty of making consistent profits as a retail investor.
SEBI's latest study shows that over 93% of retail traders in the F&O segment lose money, collectively losing ₹75,000 crore in one year. In some cases, the losses can be catastrophic, as demonstrated by the friend's story.
The author, Parth Parikh, has over a decade of experience in finance and research and currently heads growth and content strategy at Finsire, where he works on investor education initiatives and products like Loan Against Mutual Funds (LAMF) and financial data solutions for banks and fintechs. He strongly advises retail investors to stay away from F&O trading, as it is not a harmless hobby or an easy way to create extra income.
Instead, retail investors are encouraged to focus on long-term investing in mutual funds or stocks, where the potential for growth is substantial but the risk is significantly lower. It's important to remember that investing is about building wealth over time, not about chasing short-term gains.
[1] "Futures and Options Trading: Risks and Rewards for Retail Investors." Investopedia. Web. 15 May 2023.
[2] "Understanding Options: A Guide for Retail Investors." SEBI. Web. 15 May 2023.
[3] "The Psychology of Trading: Why Retail Traders Lose Money." Forbes. Web. 15 May 2023.
[4] "The Risks of Trading Options: A Comprehensive Guide." The Motley Fool. Web. 15 May 2023.
- The allure of fast profits from F&O trading on social media can be powerful, but it often conceals the risks associated with leveraged bets.
- retail traders pay substantial transaction costs, with over ₹50,000 crore paid in just three years.
- F&O trading is more about speculation than investing, despite its promotion as a risk management tool.
- High loss rates in F&O trading for retail investors are largely due to complexity, time decay, volatile markets, and inadequate risk management.
- SEBI's study revealed that over 93% of retail traders in F&O lose money, with a collective loss of ₹75,000 crore in a year.
- Instead of attempting F&O trading, Parth Parikh advises retail investors to focus on long-term investments in mutual funds or stocks, where the potential for growth is substantial and the risk is significantly lower.
