F&O market SEBI reforms: The futures and options segment has seen an explosive rise in India, with trading volumes on the National Stock Exchange and Bombay Stock Exchange reaching record highs. Much of this activity is driven by retail investors, drawn by the allure of high returns with low capital outlay. But this high-octane market has turned out to be a double-edged sword. Reports of mounting retail losses and allegations of market manipulation — most notably the case involving US-based trading firm Jane Street — have prompted the Securities and Exchange Board of India to tighten the regulatory screws.
In late May, SEBI barred Jane Street from the Indian market and impounded ₹4,843 crore, citing manipulative trades in Nifty index futures. The case underlines the latent volatility and risk that accompany the F&O boom, especially for under-informed participants. While these instruments offer legitimate hedging and speculative opportunities, they demand more than casual engagement. SEBI’s response suggests the regulator is no longer willing to let enthusiasm run ahead of understanding.
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Understanding the instruments
Futures contracts allow investors to buy or sell an asset — such as a stock, commodity, or index — at a pre-agreed price on a future date. For instance, if a trader expects Reliance Industries’ stock to rise to ₹3,000 within a month, they might buy a futures contract at ₹2,800. If the stock hits ₹3,000, the trader gains the difference; if it falls to ₹2,700, the loss is equally swift. The entry cost is just a fraction of the total value — known as the margin — making the instrument highly leveraged and therefore risky.
Options offer more nuanced bets. A call option gives the buyer the right (but not the obligation) to buy an asset at a fixed price before a certain date. A put option offers the right to sell. Suppose a trader buys a Nifty 23,000 call option for ₹100. If the index exceeds 23,100, there’s profit; if not, the ₹100 premium is the only loss. The appeal lies in the asymmetric risk-reward structure: limited downside, unlimited upside—on paper at least.
However, the reality for most retail traders is different. F&O trades are fast-moving, unforgiving of error, and rarely forgiving of inexperience. Without a solid grasp of volatility, pricing, and global triggers, retail investors often find themselves overexposed and underprepared.
The retail surge
Retail participation in index options has surged from 27% in 2019 to over 35% today. Social media platforms are flooded with trading chatter, strategy tips, and app-based tools that promise ease and speed. One-click trades, real-time updates, and gamified interfaces have turned serious financial instruments into virtual games for many.
The sheer volume of trading now reflects more enthusiasm than expertise. Options contracts are discussed with the same zeal as cricket scores, often without full understanding of the risks involved. The trend has become self-reinforcing—higher volumes feed higher visibility, drawing in more retail players.
A regulatory reset
SEBI’s 21-page circular issued on May 29 aims to recalibrate the market’s risk framework. One of the most consequential changes is in how exposure is measured. Until now, SEBI treated all F&O positions in terms of lots. Holding 1,000 lots of Bank Nifty calls was considered equivalent in exposure to 1,000 lots of Bank Nifty futures. But that equivalence is misleading.
Options behave differently depending on proximity to the strike price, market volatility, and time to expiry. SEBI now proposes to calculate exposure using *delta*—a measure of how much an option’s price moves in relation to the underlying asset. This shift will allow regulators and brokers to convert all F&O positions into what SEBI calls *Future Equivalent Open Interest* (FutEq OI). A futures contract has a delta of 1 (a ₹1 move in the stock translates to a ₹1 change in the futures contract). Options, however, have deltas ranging between 0 and 1. An option deep “out-of-the-money” might have a delta of just 0.2.
By using delta-adjusted exposure, SEBI aims to standardise risk across instruments. For retail traders, this introduces a critical learning curve. What earlier looked like equal positions may now be recognised as carrying vastly different risk.
F&O market: Plugging the loopholes
SEBI is also revisiting rules around the Market-Wide Position Limit (MWPL). When traders collectively hold 95% of allowable contracts in a stock, it enters a ban period, during which no fresh positions can be created. Yet, in practice, traders have found ways around the rule—closing and reopening positions, switching sides, or layering trades in ways that skirt the spirit of the limit.
The new rules attempt to close these loopholes by linking penalties and restrictions to delta-adjusted exposures. For retail traders, the message is clear: ignorance of these technical metrics is no longer affordable.
Trading platforms like Zerodha have long warned that F&O is not for the faint-hearted. Sudden global events, data surprises, or even algorithmic trading patterns can wipe out retail portfolios in a flash. For seasoned traders, such volatility can be managed—even monetised. For the uninitiated, however, the risk often outweighs the reward.
SEBI’s reforms are not designed to slow down the market but to make it smarter and more transparent. In doing so, they are signalling the kind of derivatives ecosystem India wants—one where sophisticated tools are matched by informed participation and sound risk management. That means fewer shortcuts, stricter guardrails, and a regulatory framework that places prudence above frenzy.