Futures and Options in India: The Mechanics, the Leverage and the SEBI Data

Direct Equity — Arc 4, Article Two

Futures

What a futures contract actually is

A derivative is a contract whose value is derived from something else — a share, an index, a commodity. You are not buying the thing. You are entering an agreement about its price.

A futures contract is an agreement to buy or sell a fixed quantity of the underlying at a fixed price on a fixed future date. Four features make it behave unlike a share. It comes in a standardised lot, not in single units, so the smallest position is large. It requires only a margin — a deposit, a fraction of the contract’s full value — rather than the whole amount. It is marked to market daily, meaning gains and losses are settled into your account every evening and a losing position demands more money from you tomorrow morning rather than at some distant date. And it expires, on a stated day, whether or not you were right.

Notice what a futures position does not give you. No ownership of a business, so no dividends, no voting, no share of retained earnings compounding away in the background. No ability to be patient, because expiry arrives on schedule and being right two months late is identical to being wrong. Every argument this pillar has made about owning good businesses for long periods is simply unavailable here. That is not a criticism of the instrument. It is a statement that it does a different job.

Options

Options: the right, not the obligation — and who is on the other side

An option gives its buyer the right, but not the duty, to buy or sell the underlying at a stated price — the strike — until expiry. A call is the right to buy; a put is the right to sell. For that right the buyer pays a premium to the seller, and the premium is the price of the whole arrangement.

The two sides of that contract are not mirror images, and this asymmetry is the most important thing a beginner can understand about options.

The buyer’s position. Maximum loss is the premium paid — genuinely capped, which is what makes options sound safe. What is rarely said next is that losing the entire premium is not an unusual outcome; it is the normal one. An option is a wasting asset: part of its price is time value, and that portion drains away every single day, faster as expiry approaches, whether or not the underlying moves. To make money, a buyer needs the direction right, the size of the move large enough to beat the premium paid, and the timing right, all three before expiry. Being correct about a company and wrong about six weeks is a complete loss.

The seller’s position. The seller collects the premium and takes on the obligation. Their maximum gain is that premium and nothing more; their loss, if the market moves hard against them, can be many multiples of it. Selling options therefore produces a very high proportion of small winning trades punctuated by occasional very large losses — exactly the shape that the mistakes article showed can destroy a portfolio despite a win rate above 90%. A seller who has been right forty weeks running has learned almost nothing about whether the strategy works, because the entire question is what happens in the week they are wrong. Option selling also demands margin that rises as the position moves against you, which means the loss and the cash call arrive together.

That is the honest summary of the segment’s two most popular activities: buying options usually loses slowly and reliably, and selling options usually wins slowly and reliably until it does not.

The Arithmetic

Leverage: the number that decides everything

Everything unusual about derivatives traces back to one feature: you control a large exposure with a small deposit. Under the current framework an index derivatives contract is sized so that its value sits in the region of ₹15 lakh to ₹20 lakh, while the margin required to hold it is a fraction of that. Suppose the contract is worth ₹15,00,000 and the margin is ₹1,50,000 — a ratio of ten to one. Your gains and losses are calculated on the ₹15 lakh. Your capital is ₹1.5 lakh.

Move in the underlying	Change in contract value	Effect on your ₹1,50,000 margin	What it means in practice
Up 1%	+₹15,000	+10%	A quiet day produces a double-digit return
Down 1%	−₹15,000	−10%	The same quiet day, the other way
Down 3%	−₹45,000	−30%	An ordinary bad session takes a third of your capital
Down 5%	−₹75,000	−50%	Half your capital gone; a 100% gain is now needed to recover
Down 10%	−₹1,50,000	−100%	The account is wiped out, and you may owe more

Three things follow from that table, and they are the whole story.

First, the recovery arithmetic arrives ten times faster. The position sizing article showed that a 50% loss needs a 100% gain to undo. In shares, reaching 50% down usually requires something dramatic. With ten-to-one leverage, a 5% move in the underlying does it — and 5% moves are ordinary.

Second, the exit stops being yours. A share that falls 40% is your decision to hold or sell; you can wait ten years if your reasoning survives. A leveraged position that moves against you generates a margin call, and if you cannot fund it, the position is closed for you, at the worst possible moment, converting a temporary move into a permanent loss. Our margin risk versus cash calculator shows the difference between the same view expressed with and without borrowed exposure.

Third, the costs are proportionate to the exposure, not to your capital. Brokerage, exchange charges, securities transaction tax, stamp duty and GST are levied on the notional value or the premium, and in a segment where positions turn over weekly they compound into a formidable hurdle. Trading costs that look trivial per trade become the difference between a marginally positive strategy and a reliably negative one.

The Data

What SEBI’s own studies found

India is unusual in having a regulator that publishes hard numbers on how retail derivative traders actually do, using real trading records from brokers rather than surveys. There have been three such studies, they agree with each other, and SEBI publishes the findings openly — the September 2024 release is worth reading in the regulator’s own words.

The first study, published in January 2023, looked at active individual traders in equity derivatives and found roughly nine in ten losing money, with average losses in the region of ₹50,000 per person over the period examined.

The second, published in September 2024, covered the three financial years from April 2021 to March 2024 and is the most detailed. Around 93% of individual traders — more than one crore people — lost money, with aggregate net losses exceeding ₹1.8 lakh crore over the three years. Only 7.2% came out ahead at all. After accounting for transaction costs, roughly 1% managed a profit above ₹1 lakh. Among the heaviest losers, about four lakh traders lost an average of ₹28 lakh each. More than 75% of loss-makers carried on trading anyway. The share of traders under thirty rose from 31% to 43% in a single year, and around 93% of them lost money too. On the other side of these trades, proprietary desks and foreign portfolio investors — overwhelmingly algorithmic — booked profits.

The third, published in July 2025, covered 2024-25 and is the most current at the time of writing. About 91% of individual traders lost money — essentially unchanged. Their combined net loss after costs rose 41%, from ₹74,812 crore in 2023-24 to ₹1,05,603 crore, and the average loss per person rose to roughly ₹1.1 lakh. The number of people participating fell sharply, from about 61.4 lakh unique traders in the first quarter of the year to 42.7 lakh in the fourth, with the total down around 20% year on year. SEBI has published these annually in recent years, so check whether a newer edition has appeared before quoting these figures.

For completeness, a separate SEBI study of intraday trading in the ordinary cash market — no derivatives involved — found that more than 70% of intraday traders lost money in 2022-23, rising to about 76% among those under thirty. Leverage makes the outcome worse and faster, but the underlying difficulty is short-horizon trading itself.

Why

Zero-sum before costs, negative-sum after

Those figures are not bad luck and they are not a run of unusual years. They follow from what the instrument is.

When you buy a share, your gain does not require anyone else’s loss — the business grows, earnings rise, and every shareholder can prosper together. A derivative contract has no such engine. It is an agreement between two parties, and every rupee one side gains is a rupee the other side loses. Before costs, the segment adds to nothing. After brokerage, exchange fees, securities transaction tax and stamp duty are deducted from both sides, participants as a group must lose an amount exactly equal to the costs collected. This is the same arithmetic that the index versus stock picking article applied to fund management, in a harsher form: there, everyone could still earn the market’s return before costs, and here there is no market return to share.

So the only question that matters is who you are trading against. SEBI’s answer is unambiguous: the profits sit with proprietary trading desks and foreign institutional participants, largely running algorithms that react in milliseconds, priced by teams who model these contracts for a living, with vastly lower transaction costs and no emotional attachment to any position. An individual with a phone, an evening, and a strategy learned from a video is on the other side of that trade. The 91% figure is not a mystery requiring explanation. It is what that matchup produces.

The Response

What the regulator changed, and what happened next

In October 2024 SEBI announced six measures for index derivatives, phased in from November 2024 through the following months. Taken together they were the most significant tightening the segment has seen.

The minimum contract value was raised from the earlier ₹5–10 lakh band to ₹15–20 lakh, the first such revision in nine years, which mechanically raises the capital needed for a single position. Weekly expiries were rationalised to one benchmark index per exchange, ending the situation in which some index expired almost every day of the week. Option buyers must now pay the full premium upfront rather than receiving intraday credit from a broker. An additional 2% extreme loss margin was imposed on short index options on expiry day. The margin benefit for positions spread across different expiries was withdrawn on expiry day itself. And position limits moved to intraday monitoring rather than end-of-day checks. Brokers were also required to display a prominent risk disclosure at login, telling users that nine in ten individual traders lose money in this segment. Expiry days themselves have since been standardised and reshuffled between the exchanges more than once, so check the current expiry calendar rather than relying on what you remember.

What happened next is the part worth dwelling on. Participation fell substantially — roughly a fifth fewer unique traders, with the steepest decline among the smallest accounts, exactly the group the measures were aimed at. Turnover fell. And the proportion of individual traders losing money stayed at about 91%, while aggregate losses rose 41%.

Read that honestly and it says something no amount of rule-making can fix. The measures removed people from the segment; they did not change the arithmetic for those who remained. Raising the entry price of a negative-sum game reduces the number of players. It does not turn it into a positive-sum one. Anyone waiting for regulation to make retail derivatives trading viable is waiting for something that is not on offer.

Hedging

What derivatives were actually built for

None of this means derivatives are illegitimate. They exist for a genuine economic purpose, and it is worth stating clearly, because the distinction between that purpose and what most retail activity looks like is the cleanest test available.

Hedging means you already have the risk. A farmer with a crop in the ground, a mill that must buy cotton in three months, an exporter with dollar receivables, a fund manager who must stay invested through a nervous month — each of these holds an exposure they did not choose and would like to reduce. A derivative lets them transfer it to someone willing to carry it. The position offsets something that already exists on their books.

Speculating means the contract is the exposure. If you hold no underlying position, the derivative has not reduced any risk. It has created one, with leverage attached. That is a legitimate activity in a free market and it is what the counterparty to every hedge is doing. It is simply not what the word “hedging” means, and the two get blurred constantly by people selling courses.

An individual investor can hedge for real — buying a put against a large single holding before a known event, or writing a call against shares already owned. Two honest caveats. Hedging costs money: it is insurance, the premium is real, and doing it habitually is a permanent drag on returns that will usually exceed the losses avoided. And for most retail portfolios the cheaper hedge is structural rather than contractual — a smaller position, a larger index core, an emergency fund, the tools from the portfolio article. The one-question test: what exactly am I protecting? If there is no specific answer naming a holding you own, you are not hedging.

One practical matter that surprises people at filing time: income from futures and options is generally treated as non-speculative business income rather than capital gains, taxed at your slab rate, reported in the business schedules of a return that is more complex than the one most investors file, with its own rules on carrying losses forward and its own audit thresholds when turnover is large. A year of losses therefore also buys you a materially more complicated tax return. The equity taxation article covers the reporting side, and this is a genuine case for professional help rather than a search result.

If You Still Want To

Harm reduction, since some readers will anyway

This pillar’s position has always been that prohibition is not a service and process is. Some readers will trade derivatives regardless of every number above. If that is you, the following is the difference between an expensive education and a catastrophe.

Use only money whose complete loss changes nothing about your life, and keep it entirely separate from the portfolio built in Arc 3 — never funded by an emergency fund, a loan, a credit card, or a margin facility. Prefer positions with a defined maximum loss over open-ended ones, and understand precisely what your worst case is before entering, in rupees, not in percentages. Apply the position sizing rules from Arc 3 to the notional exposure, not to the margin, since the notional is what generates your losses. Never add to a losing leveraged position; the impulse to win it back faster is the specific behaviour that ends accounts. Keep a full record including every charge and tax, and calculate your actual net result each quarter rather than remembering the good trades. And give it a fixed review point — six or twelve months — after which a negative honest total means you stop, not that you try harder with a new strategy.

One last framing. The technical analysis article noted that most of what is taught about short-term price prediction is confidence rather than evidence. Derivatives are where that confidence gets multiplied by ten and handed a deadline. If someone is selling you a strategy that reliably beats this segment, ask why they are selling the strategy rather than simply using it — a question the article on tips and finfluencers takes considerably further.

Key Takeaways

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Frequently Asked Questions

Your questions answered

Aren’t options safer than futures, since I can only lose the premium?

That is true for option buyers, and it is a smaller comfort than it sounds. The capped loss is 100% of what you put in, and losing the whole premium is the ordinary outcome rather than the disaster case, because time value drains away every day regardless of what the underlying does. A buyer must get direction, magnitude and timing all right within a fixed window. And the protection does not extend to option sellers, whose gain is capped at the premium while the loss is not — the position most retail strategies drift towards, because selling feels like it works right up until the week it does not.

Why do nine out of ten lose? Surely it should be closer to half?

It would be, if the game were a coin toss between equals with no costs. It is neither. Every rupee gained by one side is lost by another, so before costs the whole segment nets to zero — and after brokerage, exchange charges, securities transaction tax and stamp duty, participants collectively must lose exactly what those costs take. Then consider who is on the other side: proprietary desks and foreign institutions running algorithms with far lower costs and far better information about pricing. A structurally negative game against better-resourced opponents produces exactly the distribution SEBI measured, year after year.

Can I use options to protect my portfolio?

Technically yes, practically rarely worth it for a retail portfolio. A protective put on a large single holding before a known event is a real hedge with a real cost. The problems are that contract sizes make precise hedging of a modest portfolio clumsy, that the cost is paid every time and the protection expires while your holding does not, and that habitual hedging usually costs more over a decade than the falls it cushioned. For most people the cheaper protections are structural: a position size you can survive, a broad index core, cash you do not have to sell shares to reach. Insurance is worth buying against ruin, not against discomfort.

How is F&O income taxed in India?

Generally as non-speculative business income rather than capital gains, which means it is taxed at your slab rate, reported in the business schedules of a more complex return, and subject to its own rules for setting off and carrying forward losses, plus audit requirements once turnover crosses specified thresholds. Two consequences people miss: the tax treatment differs from the equity gains treatment they are used to, and a loss-making year still creates an obligation to compute turnover, maintain records and possibly obtain an audit. Verify the current thresholds and consult a tax professional — this is one of the areas where general information is genuinely not enough.

I’ve been profitable for six months. Does that mean I have an edge?

Not yet, and the reason is in the shape of the returns rather than in doubt about your ability. Most retail derivative strategies, particularly those involving option selling, produce many small gains and rare large losses — so a six-month record of steady profits is entirely consistent with a strategy that loses heavily over a full cycle, and the losing event has simply not arrived. Ask instead: what is my single worst possible day, in rupees, if the market gaps against me overnight? Has this strategy been tested through a genuine shock rather than a calm stretch? And is my net figure calculated after every charge and tax? A record that survives those three questions across a market crisis is evidence. Six good months is a sample, not a skill.

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