India’s options boom,a 25-year-old caution

Options are widely used by retail traders to speculate on the value of the stock for immediate gains and such behaviour in large scale can distort the market

Last month, Finance Minister Nirmala Sitharaman raised the taxes on futures and options trading and the markets responded with a 2% crash. She said that the move was intended to arrest excessive speculation in the market.

An option is a contract that lets a trader lock-in today the price at which he/she can buy or sell a stock or index in the future. The product helps protect investors and traders from market swings that can incur them losses, an activity called hedging. 

It is, however, widely used by retail traders to speculate on the value of the stock for immediate gains and such behaviour in large scale can distort the market.

SEBI had acknowledged the challenge in a study which found 9 of every 10 persons trading in options lost money and came out with measures to curb volumes in the market, which is among the largest in the world in terms of number of contracts. The capital-market regulator, however, said that the losses remained even after announcement of the measures, according to its report.

The product entered the 25th year of existence in 2026 in the Indian market. A committee headed by L.C. Gupta in 1998 had recommended phased introduction of futures and options and laid down the basic ideas and structures to establish fairness. 

A subsequent committee in 2002 ,headed by J.R. Varma, economist and  now Distinguished Professor at Dhirubhai Ambani University also a former MPC member, recommended that the market was ready for the introduction and solidified the rules.