SEBI’s Study on F&O Trading: Key Lessons for Traders

Reality of F&O trading in India

Futures and Options (F&O) trading is a popular area of the stock market in India. But recently, the Securities and Exchange Board of India (SEBI) released a study that revealed some eye-opening facts about how individual traders are performing in this high-risk market. In this blog, we’ll break down SEBI’s findings and explore the key takeaways every F&O trader needs to understand.

 

 

What SEBI’s F&O Study Shows About Trader Losses

The SEBI study, which covers the period between FY 2022 and FY 2024, highlights the overwhelming losses that retail traders in the F&O market have faced. According to the study, a staggering 93% of individual F&O traders lost money during this time.

 

The Scale of the Losses

  • 1.13 crore individual traders combined faced a net loss of ₹1.81 lakh crore over three years.
  • On average, each trader lost around ₹2 lakh.
  • A smaller group of traders, around 3.5%, suffered much larger losses—about ₹28 lakh per person.
  • What’s even more alarming is that only a small percentage of traders—7.2%—were able to make any profit at all. Even fewer, just 1%, made profits that exceeded ₹1 lakh. These numbers show how risky F&O trading can be for individual investors.

 

The Hidden Costs of F&O Trading

Many people think that when you trade F&O, the outcome is simple: either you win or your counterparty wins. But the truth is that trading F&O is not a zero-sum game—it’s actually a negative-sum game. This is because the costs of trading, such as brokerage fees, taxes, and transaction costs, eat into your profits or add to your losses.

According to SEBI’s study, the cost of trading in F&O can take up 25% of a trader’s profit and loss (P&L). Brokerage fees account for 51% of these transaction costs, with exchanges taking another 20%, and the government collecting the rest. Over the three years of the study, about ₹50,000 crore in transaction costs was paid by individual traders.

This insight should make traders pause and think. Even if you’re a good trader, these hidden costs can significantly reduce your chances of making a profit. Understanding the true costs of F&O trading is crucial for anyone thinking about participating in this market.

 

Algorithmic Trading: Not the Solution You Think

One of the key insights from SEBI’s study is the role of algorithmic trading in the F&O market. Algorithmic trading, often done by big institutions like proprietary firms and Foreign Portfolio Investors (FPIs), has been one of the main ways profits have been made in F&O trading. These institutions use strategies like high-frequency trading, arbitrage, and trend-following to generate profits.

You might think that adopting algorithmic trading strategies could be the key to turning your fortunes around in F&O trading. However, the study showed that even individual traders using algorithmic methods were not profitable on the whole.

The takeaway here is that simply using algorithms isn’t enough. Successful algorithmic trading requires a deep understanding of market anomalies and the ability to capitalize on inconsistencies. For most retail traders, competing at this level is incredibly difficult.

 

The Dangers of Options Trading

F&O trading includes both futures and options, but SEBI’s study revealed that almost all individual traders are focusing on options trading. In FY24, 99.3% of F&O traders traded options at least once, and 94.2% traded only options. Futures trading, on the other hand, was much less common, with only 5.1% of traders participating in both options and futures, and just 0.7% trading only futures.

What’s fascinating is that the small group of individual traders who did trade futures were more successful, on average, than those trading options. But that doesn’t mean traders should rush into futures. Futures trading is generally simpler because it depends on the price of the underlying asset, but options are far more complex. The price of an option can be influenced by many factors, including time to expiry, market volatility, and even factors that are harder to predict.

Despite these complexities, options trading remains hugely popular. The result? Even during periods where the market rose significantly—by around 50%—the majority of options traders still lost money.

 

Why Bigger Capital Doesn’t Guarantee Success

Another surprising insight from SEBI’s study is that trading capital doesn’t make a significant difference when it comes to profitability. Many might assume that traders with more capital would have access to better advice, smarter strategies, or simply more room for error. But SEBI’s data shows that traders across all capital sizes tend to lose money at roughly the same rate.

In fact, larger traders—those with more capital—contributed more to the overall losses in the F&O market than smaller traders. This suggests that even high-capital traders can fall into the same traps, and that simply having more money to trade with doesn’t increase your chances of success in F&O trading.

 

Traders Outside Tier-1 Cities Face More Losses

SEBI’s study also sheds light on geographical trends in F&O trading. Interestingly, a large portion of individual traders comes from cities outside India’s top 30, often referred to as “Tier-2” cities. In these cities, F&O trading is even more popular than mutual fund investing.

Around 70% of all F&O traders come from Tier-2 cities.
Traders from non-urban areas contributed to 58% of the overall losses in F&O trading, while traders from Tier-1 cities contributed to just 26%.
This geographic divide highlights the challenges faced by traders in smaller cities, who may lack access to quality financial education and advisory services. Their heavy losses suggest that more needs to be done to improve financial literacy in these regions.

 

Conclusion: F&O Trading Isn’t for Everyone

The findings of SEBI’s study make one thing clear: F&O trading is not for casual participants. It’s a complex market, and the odds are heavily stacked against individual traders. High transaction costs, the dominance of algorithmic trading, and the complexities of options trading make it difficult for the average trader to succeed.

For those without institutional knowledge, sophisticated strategies, or cutting-edge technology, the chances of making money in F&O trading are slim—just 7.2% of individual traders made a profit, and only 1% earned more than ₹1 lakh.

If you’re thinking about getting involved in F&O trading, it’s essential to weigh the risks carefully. Trading in derivatives should not be treated like gambling in a casino, where the “house” always wins. SEBI’s study shows that in the world of F&O trading, the house is made up of brokers, exchanges, the government, and big institutions. For individual traders, the odds of coming out ahead are extremely low.

The key takeaway? If you don’t have an edge in this market, it’s better to stay out.

SEBI’s Study on F&O Trading: Key Lessons for Traders
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