Retail Investors Pile into Options Despite Warnings [UPSC Current Affairs]

Nifty and Bank nifty options reached a peak of 5.75 billion contracts in May 2023. In this article, you can read more about this development, a topic relevant to the Indian economy segment of the IAS Exam GS paper III.

Option Volumes Reaching a Peak

The volumes in option contracts peaked as the Bank Nifty reached a new high and Nifty also rose significantly.

• The jump in index options volumes, in turn, drove total derivatives volumes to a record 5.75 billion contracts in May ’23.
• Proprietary traders and individual investors traded in index options, contributing a whopping 98% of total derivatives volumes.
• To protect retail investors the market regulator Securities and Exchange Board of India ordered brokers to highlight the risk of trading in derivatives.
• Recently a report found that nine out of 10 individual traders in the equity futures and options segment incurred net losses.
• The major reason for huge involvement in trading in options is due to their cheaper price when compared to futures.
• Experts warn about the risk of time decay which happens in options charged by option sellers.
• Apart from time decay, there are also costs involved in the form of transaction charges which also contribute to total expenditure significantly.
• The involvement of Foreign Portfolio Investors (FPI) also increased the cash turnover in derivatives.

Derivatives:

• A derivative is a financial contract whose value is dependent upon the price of underlying assets.
• A derivative is a contract between two or more parties whose value changes based on a change in the value of the underlying asset.
• Futures and Options are types of derivative instruments.
• The leveraged nature of derivatives increases their risks and rewards.
• Futures and options are financial derivatives that allow traders to speculate on the price movements of an underlying asset without actually owning it. 
• Futures contracts obligate the buyer to purchase an underlying asset, while the seller must deliver it at a predetermined price and date.
•  In options contracts, the buyer has the right, but not the obligation, to buy or sell the underlying asset at a predetermined price and date, while the seller must honour the contract if the buyer chooses to exercise their option.

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