A Must-Read Before You Indulge in Trading Options

On this platform of “Defensive Investments” we have been very vocal about the high risk associated with trading in the future and options (F&O) segment. Every now and then we kept advising Gen-Z against this habit. We are glad that SEBI has also endorsed our views.

This week, SEBI released a research paper titled, “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment.” The objective of this report was to analyze the profit and loss (P&L) of individual traders trading in the F&O segment during the period FY 19 and FY 22.

It is an eye-opener for all those prospective traders who think that they can make easy money by trading in options. However, on the contrary, the data does not seem to be in agreement with their exuberance and optimism.

Let’s deep dive and find out what SEBI analyzed in this report.

1. The number of F&O traders increased from 7.1 lakhs in FY 19 to 45.2 lakhs in FY 22. A whopping increase of more than 500%. The number of F&O traders increased by more than six times. Out of these, 75% of participants were in the age group of 20 to 40.

2. The critical question that needs to be answered is whether they made money. The answer is a BIG NO.

In FY 22 90% of the active individual traders made losses. That means only 10% of traders were successful in making a profit. If you take the trimmed active traders, i.e. those active traders excluding the top and bottom 5 percentile (the outliers), then the loss-making percentage increases to 94%. That means only 6% of traders could make a profit.

3. Let’s see how much profit was made by successful traders. Excluding the outliers, out of the 6% of traders who made a profit, the average profit was only Rs. 3,265/-. However, the average loss made by this category is Rs. 60,314/-

That means the average loss was 15 times more than the average profit.

It is crystal clear from the SEBI report that making money in options trading is very difficult. Additionally, the risk involved is too high for a retail investor to even consider it as a probable money-making option.

However, the reasons Gen-Z is lured to options trading are the excessive noise created on social media by the self-proclaimed option experts, the peer pressure, and the excitement it offers. On social media, everything looks hunky dory on the face of it. But if you scratch the surface, the bloody wounds will be visible.

Since the beginning, we have been very vocal and blunt about trading in F&O. Many young investors argued with me in favor of bitcoin and options. I have personally spent hours together trying to persuade them to stay away from these dreadful instruments. Those who listened must have saved lakhs of rupees today.

We are glad that we did our job of protecting the money of investors honestly. The SEBI report reaffirms that we at “Defensive Investments” are on the correct path of wealth creation.

Gen-Z should not get trapped in peer pressure. What looks exciting, sexy, and fashionable need not be enduring and successful. Wealth creation is a boring, and lengthy process. Slow and steady wins the race here. It is not meant for 100-meter sprinters, but for marathon runners.

When you can create wealth by investing in mutual funds without losing sleep, why go through sleepless nights and increase your BP?

Hopefully, after reading this article, Gen-z will reconsider their decision of trading options.

Let me share the wisdom of Warren Buffet. He said:-

“Beware of the investment activity that produces applause; the great moves are usually greeted by yawns.”