Are concerns over F&O retail activity overblown?

Premium is the price that traders pay to buy an option or receive by selling an option. In comparison, the NSE data showed retail investors' activity in the (shares) is higher at 2.8% of the total turnover of ₹18.57 lakh crore in March.

Agencies

Brokers contend that though overall retail activity in equity futures & options has grown in recent years, it may not be alarming when compared to the overall turnover.

"The reason for overall volumes in derivatives being very high compared to cash market can be assigned to and proprietary trades of brokers aided by a large number of professional dealers known as ," said Vinod Goyal, national president of the Association of National Exchanges Members of India (ANMI).

The debate around the growing retail activity in F&O surfaced after recently said, "Any unchecked explosion in retail trading of futures & options can create future challenges, not just for the markets, but for investor sentiment and household finances."

A last year showed 9 out of 10 individual traders in the equity F&O segment incurred an average loss of ₹1.1 lakh during FY22. Most of them traded in the options segment.

“It's not about the volumes, but some newcomers are trading directly in options without having any knowledge or shares in the cash market, which is a concern for regulators,” said Rajesh Palviya, head of technicals and derivatives at Axis Securities. “Additionally, many unregistered influencers are encouraging new investors to trade in options by selling their strategies."

The turnover of the F&O segment on NSE based on the options premium paid was an average of 1.96 lakh crore daily in FY24 compared to 1.63 lakh crore in FY23. However, the notional turnover (based on strike value) shows an average turnover of 400 lakh crore daily in 2024.

The number of active investors in the options segment was 43.7 lakh in March 2024, as compared to 48.2 lakh in the previous month.

Many traders have shifted from trading in shares to options because of more stringent margin requirement in the cash segment.

“Some retail volume has shifted towards options, because of lower margin requirements in options especially for buyers,” said Om Damani, VP, IIFL Securities. “In the past few years, the market regulator has introduced several new norms regarding margin and pledge of shares, and one of them was the concept of peak margin reporting, in which stockbrokers will calculate margin based on the end of the day position and the intraday peak position.”