There's no future in Futures & Options

A recent SEBI study revealed that nine out of 10 traders incurred losses in futures and options (F&O). On average, an individual trader lost Rs 82,500 in 2022. For the uninitiated, futures and options (F&O) are derivatives traded on the stock exchanges that derive their value from underlying assets like shares and commodities. Despite the alarming statistics, numerous retail investors are still attracted to futures and options. It's not entirely their fault. When presented with alluring returns in a glossy and glamorous manner, it's no surprise that F&O trading manages to captivate investors. So, before you decide to lose your hard earned money, let's understand why F&O is risky and why staying away from it is a better idea for an investor. Complex pricing Unlike stocks, where price movement is more straightforward, F&O pricing is complex and a function of multiple variables, such as the volatility of the stock, time till expiry, strike price, discount rate, and current stock price. For example, as can be seen in the table, while the price of Reliance Industries increased by 7.34 per cent, the price of its derivative appreciated by a whopping 300 per cent in the same time period. Date Price Reliance Industries opening share price Nov 20, 2023 Rs 2,349 Reliance Industries closing share price Dec 18, 2023 Rs 2,521 Price appreciation 7% Derivative* opening price Nov 20, 2023 Rs 11 Derivative* closing price Dec 18, 2023 Rs 44 Price appreciation 300%

This article was originally published on December 27, 2023.