India’s derivative market has grown sharply. More retail traders are now active in options and futures. A recent Sebi study said most individual traders lose money in derivatives. The regulator also warned about rising speculative behaviour.
Here is a simple explainer.
Derivatives are financial contracts. Their value comes from an underlying asset. The asset can be a stock, index, commodity or currency. Traders do not buy the asset directly. They trade on expected price movements.
What is futures trading?
A futures contract is an agreement. The buyer and seller agree to trade an asset at a fixed price on a future date. Futures are compulsory. Both sides must honour the contract on expiry. These contracts are used for hedging and speculation.
Example: If a trader expects Nifty to rise, they may buy Nifty futures. If the index goes up, they profit. If it falls, they lose.
What is options trading?
Options give the right, not the obligation, to buy or sell.
There are two types of options:
Call option: Right to buy.
Put option: Right to sell.
Traders pay a premium for this right. The risk for the buyer is limited to the premium. But the seller of an option carries higher risk.
Example: If a trader buys a call option on a stock expecting a rise, they gain if the stock moves above the strike price.
What Sebi found
Market regulator Securities and Exchange Board of India (SEBI) found that the vast majority of individual retail traders lose money in the futures and options (F&O) market. In FY25, 91% of individual traders incurred net losses, and in the period from FY22 to FY24, 93 per cent of traders lost money. This has prompted SEBI to introduce tighter regulations to curb excessive speculation and enhance investor protection.
Why derivatives matter
Derivatives help in hedging, price discovery and risk transfer. But they can also lead to heavy losses. This is because small price moves create large gains or losses due to leverage.
