F&O losses: It’s not just about risk, but who is taking it

Last week, SEBI (Securities Exchange Board of India) has come up with its second edition of the study on retail participation in equity derivatives. The earlier study was conducted in September 2024 had established a stark fact that 93 per cent of the individual traders lost money in equity F&O between FY22 and FY24, with aggregate losses exceeding Rs1.8L-cr. In between Jane Street and other algocase verdicts which hogged enough headlines were published in the study. The new FY25-26 studies show some moderation in participation, but they also uncover something more important – the behavioral characteristics associated with persistent losses.

The latest release comprises two studies: Profitability of Individual Traders in the Equity Derivatives Segment and Trading Behaviour of Individual Traders in the Equity Derivatives Segment. The studies use client-level data on transactions, costs, demographics and trading patterns; the profitability study covers approximately 90 per cent of individual investors through data from the top 15 brokers, while the behavioural study also uses a random sample of 5,000 traders.

The first encouraging sign is that retail participation has moderated. Active individual traders declined by about 20 per cent, from 98.1 lakh in FY25 to 78.6 lakh in FY26, while new entrants declined by nearly 40 per cent. The proportion of traders losing money also improvedfrom 91.1 per cent in FY24 in the previous study to 87.7 per cent in FY26. Yet the improvement can’t be overstated.

Individual traders still incurred aggregate net losses ofapprox. Rs91,685 cr in FY26, while the average loss remained around Rs1.17 lakh per trader. In other words, fewer people are participating, but the remaining activity continues to produce enormous losses.

The most revealing finding is that losses are heavily concentrated among financially smaller investors. About 35 per cent of individual derivatives traders had no equity holdings, while nearly 78 per cent had equity portfolios below Rs1 lakh. These small-portfolio traders accounted for approximately 70 per cent of aggregate losses despite contributing only about half of the turnover.

The relationship between financial capacity and loss incidence is striking: 93 per cent of traders with no equity holdings incurred losses, compared with 58 per cent among those with equity portfolios above Rs10 crore.

This suggests that the problem is not merely whether derivatives are risky. The mismatch between an investor’s financial resources and the intensity of trading may be more important. SEBI finds that younger investors, lower-income groups and those with smaller portfolios exhibit substantially higher trading intensity relative to their financial resources. Higher turnover relative to capital or equity wealth is associated with higher loss rates.

The nature of trading itself is another major concern. Nearly 97 per cent of traders predominantly followed option-buying strategies, while only around 2 per cent were predominantly option sellers. Options buyers recorded substantially weaker outcomes, while option sellers were the only strategy group with positive median returns on capital employed.The concentration of activity around expiry is equally remarkable: approximately 59 per cent of index-options turnover occurred in contracts expiring on the same day, 75 per cent within one day of expiry and 97 per cent within one week.

The new study also challenges the assumption that mere experience automatically makes traders better. Loss incidence remains high across levels of experience, with several years of participation not translating into improved profitability. More troublingly, among traders who lost money for two consecutive years and continued trading, around 90 per cent lost again in the following year. This suggests that repeated losses do not necessarily generate learning; they can instead become a persistent behavioural pattern.

The quarterly data reinforces this conclusion. About 85 per cent of trader-quarter observations were loss-making, against only 15 per cent profitable. Among traders who experienced both profitable and loss-making quarters, nearly 79 per cent had average gains in winning quarters that were smaller than their average losses in losing quarters. The pattern therefore resembles a classic behavioural trap: frequent small successes can coexist with occasional, larger losses that dominate the overall outcome.

Transaction costs add another dimension. Individuals incurred around Rs25,000 crore in transaction costs during FY26, taking cumulative transaction costs over FY22–FY26 to approximately Rs1 lakh crore.At the other end of the market, proprietary traders and FPIs continued to generate substantial gross trading profits, with 99 per cent of their profits coming from algo entities.

Taken together, the 2024 and 2026 SEBI studies tell a powerful story. The earlier study established that retail F&O trading is overwhelmingly loss-making. The new study explains more clearly why. The typical high-risk pattern is one of small financial resources, high trading intensity, option buying, short-expiry exposure and continued participation despite repeated losses.

The central lesson, therefore, is not simply that investors should “avoid F&O.” It is that financial capacity, trading intensity and behaviour matter enormously. For investors, the relevant question should not merely be about whether they make money trading derivativesbut ratherthe scale and intensity of the trading appropriate to their financial resources and long-term financial goals. SEBI’s latest evidence reinforces that, for a large section of retail investors, the answer is unfortunately still no.

(The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst and could be reached at [email protected])

ABOUT THE AUTHOR

K Naresh Kumar

K Naresh Kumar[email protected]