Individual investors should avoid trading in F&O segment as it’s clearly a loss-making proposition (2024)

FAQs

Is it safe to invest in F&O? ›

Buying options means limited risk, but you rarely make money. Many small F&O traders prefer to buy options as their risk is limited to the premium paid. Option sellers take more risks and earn more than option buyers more often. However, it is prudent to remember that there is limited risk when buying options.

There are many reasons for this, but some of the most common include: Lack of knowledge: Many traders enter the F&O market without a good understanding of how it works. They may not understand the risks involved, or they may not have a trading strategy.

Now that you are aware of the F&O trading process, here are a few things to be mindful of: Options contracts have a risk limitation to your premium amount, but on the flip side, money-making is also limited. Future margins have a rising tendency when the market is volatile.

Risking Your Principal. Like other securities including stocks, bonds and mutual funds, options carry no guarantees. Be aware that it's possible to lose the entire principal invested, and sometimes more. As an options holder, you risk the entire amount of the premium you pay.

Conclusion. However, as previously stated, since precise price movement projections must be made, futures and options carry a significant level of risk. To make money from trading derivatives, it is important to have a solid understanding of stock markets, underlying assets, issuing companies, etc.

Options are generally risky, but some options strategies can be relatively low risk and can even enhance your returns as a stock investor. Like stockholders, owners of options can enjoy the potential upside if a stock is acquired at a premium to its value, though they'll have to own the options at the right time.

A 2021-22 report from the Securities and Exchange Board of India (Sebi), India's market regulator, stated that 90% traders in F&O lost money during the year. Their collective losses?

The Rule of 90 is a grim statistic that serves as a sobering reminder of the difficulty of trading. According to this rule, 90% of novice traders will experience significant losses within their first 90 days of trading, ultimately wiping out 90% of their initial capital.

His agency, the Securities and Exchange Board of India, known as Sebi, says 90% of active retail traders lose money trading options and other derivative contracts. In the year ended March 2022, the latest for which figures are available, investors lost $5.4 billion.

Who might not want to consider trading options? Buy and hold investors. Individual investors whose investing plan involves buying stocks, bonds, and other investments with a multiyear time horizon may not typically consider trading options (although there can be circ*mstances where it may be appropriate).

How many F&O traders make money? ›

According to a study by Sebi, in FY22 only 11 percent of individual traders in the equity F&O segment made profits, with an average profit of Rs 1.5 lakh.

Lack of a clear strategy: Options trading requires a well-defined strategy. If options buyers do not have a clear plan, exit strategy or risk management in place, they may make impulsive decisions that lead to losses.

The Bottom Line. So is options trading risky? If you do your research before buying, it is no riskier than trading individual issues of stocks and bonds. In fact, if done the right way, it can be even more lucrative than trading individual issues.

Unlike gambling, options trading provides the opportunity for profit through strategic decision-making and analysis of the underlying asset. While there is an element of risk involved, options trading is not solely based on chance, but rather on probability and analysis.

The option sellers stand a greater risk of losses when there is heavy movement in the market. So, if you have sold options, then always try to hedge your position to avoid such losses. For example, if you have sold at the money calls/puts, then try to buy far out of the money calls/puts to hedge your position.

Only 1 out of 10 F&O traders made profit in FY22; average loss stood at ₹1.25 lakh | Mint.

According to a study by Sebi, in FY22 only 11 percent of individual traders in the equity F&O segment made profits, with an average profit of Rs 1.5 lakh. The percentage went down to 10 percent for active traders, though the average profit made by them went up to Rs 1.9 lakh during the same period.

Risk & Reward

A combination of leverage (which refers to a possibility to enter into a sizable contract value with a relatively small amount of capital) and knowledge of risk mitigating strategies in the F&O segment can give you significantly more return on capital vis-à-vis equity trading or investing.

Options are generally considered safer than futures because the potential loss in options trading is limited to the premium paid, whereas futures carry higher risk due to potential unlimited losses resulting from leverage and market movements.