August sees record participation of retail investor in derivatives market: Report

Retail investors in India have flocked to the derivatives market on the National Stock Exchange (NSE) in record numbers during the month of August, as per a mint report. This despite the market regulator's warnings surrounding the risks.

According to data from the NSE, the number of retail investors primarily trading index options on the exchange reached a new high of 4 million in August. This marked a notable increase from the 3.7 million recorded in July and was well above the monthly average of 2.8 million observed throughout the previous fiscal year (2022-23).

This surge in retail participation can be attributed to the growing popularity of zero-day options, which offer daily expirations at relatively lower costs.

Speaking to Mint, Chandan Taparia, Vice President of Derivatives and Technical Research at Motilal Oswal Financial Services Ltd (MOFSL), noted, "Retail interest in zero-day options has been increasing and has hit a crescendo so far this fiscal (2023-24) with markets breaking out of the December high." He also pointed out that the popularity of daily index options is evident with BSE's introduction of weekly Sensex options earlier this year.

Zero-day options allow traders to speculate on daily price movements and tend to be more affordable than monthly expiration options. Retail investors are drawn to these options due to their cost-effectiveness and the potential for substantial gains. However, it's important to note that options lose value as they approach their expiration date, and option sellers are often more knowledgeable and financially stable than buyers.

To address the risks associated with derivatives trading, the Securities and Exchange Board of India (SEBI) mandated that brokers display mandatory risk disclosures on their websites and each derivatives order. These disclosures highlight the challenges and potential losses in derivatives trading.

Before punching an online order, investors must click on the “I Understand” button, which runs risk disclosures like “Nine out of 10 individual traders in equity Futures and Options Segment incurred net losses” and “On an average, loss makers registered net trading loss close to ₹50,000

U.R. Bhat, Co-founder and Director of Alphaniti Fintech, highlighted to Mint, that the low cost of weekly options is a significant attraction for retail investors. He stated, "Zero-day options tend to be cheaper than monthly expiry options, so retail investors are drawn to them due to their affordability and the hope of earning substantial profits."

The NSE initially introduced monthly index options in 2001, followed by weekly Bank Nifty options in 2016 and weekly Nifty options in 2019. In subsequent years, the exchange added weekly options for the Nifty Financial Services Index (Finnifty) and the Nifty Midcap Select Index, catering to different segments of the market.

Index options accounted for a significant 98% of the notional derivatives turnover, totalling ₹35,790 trillion, in the fiscal year through September 15.

In terms of market share, retail investors constituted 27% of equity derivatives trading in the April to August period of 2023-24, trailing behind proprietary traders at 58.6%. Foreign portfolio investors accounted for 5.9%, corporates 3.6%, and others 4.7%, reported Mint.