Traders advise caution as retail activity in F&O segment picks up

Market participants say heightened volatility in markets is attracting investors to take advantage of sharp swings, but only few will end up making money

Retail investors are showing more interest in the futures and options (F&O) segment, with the share of such activity rising to 41 per cent in April, against a 12-month average of 38 per cent. 

Market participants say the heightened volatility is attracting investors who wish to take advantage of the sharp swing in the bourses. 

“A spike in volatility gives more opportunities to traders, compared to when markets are flat or consolidating. At our end, we have seen interest among retail clients more than double, on a year-on-year basis,” said Jimeet Modi, CEO of Samco Securities. 

Year-to-date, the India VIX — a volatility gauge for markets — has jumped as much as 8x, touching a high of 83.61 in March.  

However, market participants say high exposure to the F&O segment could get risky for retail participants, given that large swings in an unfavourable direction could quickly erode capital. 

On Tuesday, the Nifty (which is widely traded in F&O) opened with gains of over 2 per cent, before reports of skirmishes at the border between India and China pulled the frontline index into the red zone. Later, it recovered to end 1 per cent higher.  “Investors that had started to build positions with put options — expecting deeper correction — were caught off-guard, thus incurring heavy losses,” said a dealer with a broking firm. 

 

 

For instance, the Nifty put option — with a strike price of Rs 9,900 — saw its premium touch the day’s high of Rs 246, before seeing an erosion of 54 per cent from these levels. “Such moves led to capital erosion for investors who had taken large positions on the put side,” he added. An executive of a leading brokerage and financial services firm said retail investors should enter the F&O segment only with money they can afford to lose. “At any point of time, investors should not have more than 5-10 per cent of their portfolio exposed to F&O,” he said.

The executive added that limits introduced by the Securities and Exchange Board of India on institutional investors in the F&O segment, towards the end of March, could contribute to an even proportion for retail investors in their F&O volume mix. Effective March 23, Sebi introduced certain limits on institutional investors to curb short-selling, allowing naked long-short positions in the F&O segment under certain conditions. 

However, some experts call this a temporary spike, and say retail investors’ interest could subside in the days to come. 

“During the lockdown, we have seen trader interest in markets rise. Employees who are restricted to their homes seem to have turned traders taking bets on short-term moves to gain from the daily market volatility,” said Deepak Jasani, head (retail research), HDFC Securities.

“Those with larger risk appetites are trading in F&O. However, only a few will end up making money in this temporary distraction as study, discipline, and money management principles take time to be imbibed,” he added.