The Securities and Exchange Board of India's (SEBI) efforts to curb the frenzy in options trading appear to be taking hold, but not without significant consequences for small investors. Recent data indicates a waning of the options trading boom in India, accompanied by a retreat of small investors who have faced heavy losses.

SEBI's Curbs and Their Impact

In late 2024, SEBI implemented a series of measures aimed at reining in speculative activity in the derivatives market. These curbs included:

• Limiting weekly expiries: Exchanges are now restricted to offering weekly derivative contracts for just one benchmark index.
• Increasing contract sizes: The minimum contract value has been raised to between ₹15 lakh and ₹20 lakh, up from the previous range of ₹5-₹10 lakh.
• Upfront premium collection: Option buyers are now required to pay premiums upfront.
• Higher margin requirements: SEBI has tightened margin requirements for F&O trades.
• Intraday monitoring of position limits: Brokers are required to monitor position limits intraday.
• Additional margin for short options: SEBI imposed a 2% Extreme Loss Margin on all short options positions on expiry day to reduce speculative risks.

These measures have had a discernible impact on the market. The 30-day rolling average of options contracts traded by individual investors on the National Stock Exchange (NSE) has declined significantly since the first set of curbs took effect in November 2024. The number of derivatives traders has also slumped.

Small Investors Retreat Amid Losses

While SEBI's curbs have cooled down the market, they have also coincided with substantial losses for retail investors. A recent study revealed that individuals in India lost over US$12 billion (approximately ₹1.06 lakh crore) trading equity derivatives in the fiscal year 2025. This marks a sharp jump from the ₹74,812 crore lost in the previous year.

The study also highlighted that around 91% of retail investors continue to lose money in the F&O segment. This indicates that despite the regulatory changes, the odds remain stacked against small traders in the derivatives market.

Why Small Investors Are Losing

Several factors contribute to the losses incurred by small investors in the options market:

• Speculative nature of F&O: Many retail traders treat F&O trading as speculation rather than investment, lacking the necessary training and tools.
• Competition with institutional powerhouses: Retail investors often trade against institutional investors, high-frequency trading firms, and algorithmic traders who have superior resources and expertise.
• Hype and misinformation: Social media often promotes unrealistic expectations and misleading strategies, leading to poor decision-making.
• High trading costs: Frequent trading incurs significant costs in the form of commissions, transaction taxes, and slippage, eroding potential profits.

SEBI's Next Steps

The growing losses among retail investors may prompt SEBI to tighten trading rules further. The regulator had earlier signaled that it would reassess the need for additional actions after studying the impact of its November measures.

One proposal under consideration is to replace the current weekly expiry cycle for derivatives with fortnightly or monthly expiries. SEBI believes that weekly expiries contribute significantly to short-term volatility and may be distorting price discovery. However, SEBI Chairman Tuhin Kanta Pandey has stated that an outright shutdown of weekly options would not be "practical".

SEBI is also exploring steps to incentivize greater participation in the cash market, including a possible reduction in securities transaction tax (STT) and lower margin requirements for trades in the cash segment.

Conclusion

SEBI's curbs have had a cooling effect on India's options trading boom, but the retreat of small investors amid heavy losses raises concerns about the impact of speculative activity on household savings. While the regulator's measures aim to protect investors and promote market stability, further steps may be needed to address the unique challenges faced by retail traders in the derivatives market. Adapting to the evolving regulatory landscape requires a disciplined approach, informed decision-making, and a focus on risk management.