F&O trading has seen a remarkable rise in popularity, capturing the attention of both big investors and newcomers. This surge isn’t merely a trend; it reflects a shift in how individuals and institutions approach financial markets. The appeal lies in the potential for better returns and the flexibility these instruments offer.
The segment’s popularity is clear from its significant growth, with the F&O trading segment’s monthly turnover soaring to ₹8,740 trillion in March 2024, up from ₹217 trillion in March 2019. Meanwhile, the equity cash segment’s average daily turnover was ₹1 trillion, and the F&O segment reached ₹330 trillion. As more participants enter the market, driven by the allure of strategic opportunities, F&O trading continues to grow. This blog explores the reasons for this increasing interest and examines why it has become a focal point for those looking to invest in the share market online.
About F&O trading
Futures and options trading offer investors distinct approaches to managing their investments. An options contract grants the right, without the obligation, to buy/sell stock at a specific price within the contract’s duration. In contrast, a futures contract obligates the buyer to purchase and the seller to sell shares on a predetermined future date unless closed before expiry. Options trading involves asymmetry, setting it apart from futures.
Consider an example where “X” buys ABC futures at Rs.950, and “Y” sells them. Both parties experience symmetrical outcomes: if the price rises to Rs.970, “X” gains Rs.20, while “Y” loses Rs.20, and the reverse happens if it drops to Rs.930. However, in options, the buyer’s loss is limited to the premium paid, whereas the seller faces potentially unlimited losses. Futures are leveraged products, meaning both profits and losses are amplified. For instance, by paying a 20% margin on a Rs.100,000 investment, you leverage your position fivefold. A 10% price increase results in a 50% profit on your margin. However, the same applies to losses, which also multiply. Understanding that leverage impacts both gains and losses is crucial when trading in futures.
Both futures and options allow investors to buy investments at a set price within a specified timeframe. These financial tools can be used for returns or as a hedge against existing investments. However, the markets for these products differ significantly in operation and risk.
| Features | Futures | Options |
| Obligation | Must buy/sell on expiry | Right, no obligation |
| Risk | High leverage | Limited to premium paid |
| Leverage | High leverage | Lower leverage |
| Flexibility | Less flexible | More flexible |
Why are Indian investors buying F&O?
F&O trading has seen a surge in interest across India, drawing in both experienced investors and newcomers. As more individuals seek diverse avenues for potential profits and risk management, these financial instruments have become increasingly attractive. Below are five key reasons driving the growing popularity of futures and trading options, especially for those looking to invest in the share market online.
1. Increased accessibility
One reason why F&O trading is gaining popularity in India is the ease with which people can invest in the share market online. With the rise of online trading and investment platforms, new investors now have more opportunities to participate in these markets, making them more accessible than ever before.
2. Potential for higher returns
F&O trading is attractive to many because it offers higher chances of profit. These financial instruments allow investors to leverage their positions, which can amplify profits. This potential for increased earnings is a key factor driving more people to explore these options.
3. Risk management
Investors in India are increasingly using futures and trading options as tools for risk management. These products provide a way to hedge against potential losses in other investments. By incorporating them into their portfolios, investors can protect themselves from market volatility while still aiming for profits.
4. Flexibility in strategies
The flexibility that futures and trading options offer is another reason for their growing popularity. These products allow investors to implement a variety of trading strategies, catering to different risk appetites and financial goals. This adaptability makes them appealing to a broad range of investors.
5. Growing awareness
Lastly, the increasing awareness of F&O trading is contributing to their popularity. As more people educate themselves about these financial instruments, they are more likely to invest in the share market online, using these tools to enhance their investment strategies.
Latest developments in F&O trading
Derivatives are financial instruments whose value is derived from an underlying asset, such as stocks, commodities, or indices. Futures and options are two common types of derivatives in trading. The Securities and Exchange Board of India (Sebi) has proposed increasing the minimum value of index derivatives contracts to enhance the appeal of the popular options segment.
The proposed hike would raise the contract size from the current ₹ 5 lakh to ₹15-20 lakh initially and then to ₹20-30 lakh after six months. This move is intended to raise the entry barrier for smaller investors as futures and options trading becomes more attractive.
Currently, index options dominate 29% of the overall F&O trading turnover, up from 5% in FY20. Meanwhile, the share of index futures has decreased to 15% from 29% in the same period. Experts say these changes will further increase the appeal of options trading.
Investing in F&O wisely
The increasing popularity of F&O trading highlights its appeal due to potential profits and rising trading volumes. The proposed changes to contract sizes and transaction taxes are expected to boost the attractiveness of options trading further. As the market evolves, investors need to stay informed and adapt their strategies to navigate the opportunities and risks in futures and options trading.
To invest in futures and options online, You can consider Ventura. It is a trusted stock trading app and brokerage platform that offers the tools and guidance needed to invest in the share market online. Consider Ventura as your partner in building a streamlined and well-managed trading portfolio.
