SEBI F&O Loss Study Explained: Why 9 in 10 Retail Traders Lost ₹91,685 crore in FY26

The crowd thinned, but the odds barely moved.

Nearly nine out of every 10 individual traders in India’s equity derivatives market lost money during FY26, according to two new studies released by the Securities and Exchange Board of India.

Retail participation fell sharply after years of explosive growth. Aggregate losses also dropped from approximately ₹1.12 lakh crore in FY25 to ₹91,685 crore in FY26. That might appear to be an improvement. The closer numbers tell a harsher story. As many as 87.7 per cent of individual traders still ended the year in the red. The average loss per trader edged up to approximately ₹1.17 lakh. Options generated around 92 per cent of total individual losses, while transaction costs consumed another ₹25,000 crore.

The market did not simply defeat newcomers learning an unfamiliar product. SEBI found that among traders who lost money for two consecutive years and continued trading, approximately 90 per cent lost again in the following year. So, why do losses persist even as participation falls and regulations tighten?

What exactly did SEBI find?

SEBI’s profitability study found that the number of active individual equity derivatives traders fell from 98.1 lakh in FY25 to 78.6 lakh in FY26, a decline of approximately 20 per cent. New entrants dropped by roughly 40 per cent, suggesting that the flood of first-time traders into futures and options, popularly known as F&O, has begun to recede. But fewer traders did not produce substantially better outcomes for those who remained. Around 87.7 per cent of individuals lost money during FY26. Their aggregate net loss stood at approximately ₹91,685 crore. The average loss increased marginally to about ₹1.17 lakh per trader.

SEBI based its profitability analysis on client-level data from the top 15 brokers, which together represented approximately 90 per cent of individual investors participating in equity derivatives. The regulator separately examined trading behaviour, transaction costs, demographics and the relationship between trading intensity and financial outcomes. The findings continue a pattern identified in SEBI’s earlier research. In September 2024, the regulator reported that 93 per cent of individual F&O traders had lost money between FY22 and FY24, with aggregate losses exceeding ₹1.8 lakh crore over those three years, according to SEBI’s previous study.

If total losses fell, why is the picture still worrying?

Aggregate losses declined largely because far fewer people participated. The number of active traders dropped by almost one-fifth, while the arrival of new traders slowed even more sharply. Reuters reported that approximately 46 lakh people who had traded equity derivatives in FY25 did not return in FY26. That was substantially higher than the 26 lakh exits recorded a year earlier.

A smaller group losing less money in total does not necessarily mean the typical trader became better at F&O. That distinction is visible in the average loss. Despite aggregate losses falling by approximately 18 per cent, the average loss per individual trader rose slightly to ₹1.17 lakh. The headline improvement, therefore, came primarily from reduced participation rather than a decisive improvement in retail profitability. The percentage of loss-making traders did improve from the approximately 91 per cent reported for FY25. But at 87.7 per cent, the probability of an individual finishing the year with a loss remained exceptionally high.

Why do options dominate retail losses?

Options accounted for approximately 92 per cent of the aggregate losses suffered by individual traders. Nearly 97 per cent of traders predominantly followed option-buying strategies. Only around 2 per cent were classified mainly as option sellers. An option buyer pays a premium for the right, without the obligation, to buy or sell an underlying asset at a predetermined price. The buyer’s loss on an individual contract is generally limited to the premium paid. This limited upfront amount can make options appear cheaper and safer than they really are.

The difficulty lies in time and probability. An option must move sufficiently in the trader’s favour before it expires. As expiry approaches, its time value can erode rapidly. A trader may correctly predict whether an index will eventually rise or fall and still lose because the move was too small, arrived too late or failed to cover the premium and transaction costs. Short-duration contracts can intensify that pressure. Traders are forced to predict not merely direction, but direction, timing and magnitude.

SEBI found that option buyers recorded substantially weaker outcomes than option sellers. That does not make option selling automatically safer. Sellers face potentially severe losses, must meet higher capital and margin requirements, and often use more sophisticated risk-management strategies. The comparison instead shows how a market crowded with small option buyers can repeatedly transfer money towards better-capitalised and technologically stronger participants.

Who made money while individuals lost it?

Larger and more sophisticated market participants continued to generate significant trading profits. Proprietary trading firms, which trade with their own capital, recorded gross trading profits of approximately ₹44,000 crore in FY26. Foreign portfolio investors followed with around ₹14,000 crore, according to Reuters’ account of the SEBI findings.

The technological divide was striking. SEBI found that algorithmic trading entities generated 99 per cent of the profits earned by proprietary traders and foreign investors. These firms can deploy automated systems, sophisticated pricing models, faster execution, larger pools of capital and strategies spread across multiple instruments. An individual buying a short-dated option from a mobile phone may technically be participating in the same market, but is not necessarily playing the same game.

Derivatives markets are not designed solely for speculation. They allow investors and institutions to hedge risks, improve price discovery and manage portfolios. But when individuals use complex, rapidly expiring instruments primarily to make short-term bets, they enter a contest dominated by participants with more capital, information and technology.

How much do transaction costs matter?

Individual traders paid approximately ₹25,000 crore in transaction costs during FY26. Across FY22 to FY26, their cumulative transaction costs reached roughly ₹1 lakh crore. These costs include brokerage, exchange charges, securities transaction tax, regulatory fees, stamp duty and goods and services tax. A single trade may make those charges appear small. Repeated buying and selling allows them to compound.

Transaction costs also raise the return a trader must earn merely to break even. A position that produces a small trading profit before expenses can become a net loss after all charges are deducted. This becomes particularly damaging in high-frequency retail behaviour. A trader who repeatedly enters and exits contracts does not start each new trade from zero. The costs keep accumulating while the trader attempts to recover previous losses.

SEBI’s finding that around ₹1 lakh crore was absorbed by transaction costs over five years shows that trading activity itself has become a major drain on individual capital, independent of whether a market call was correct.

Does trading more frequently improve the odds?

SEBI found the opposite. Higher trading intensity relative to the capital employed or the size of a trader’s equity portfolio was associated with higher rates of loss.

The regulator also found that younger investors, lower-income traders and people with relatively small equity portfolios tended to trade derivatives more aggressively relative to their financial resources. That distinction matters. A ₹50,000 loss does not affect every trader equally. For someone with a large investment portfolio and stable income, it may be manageable. For a younger or lower-income trader deploying a substantial share of available savings, the same loss can be financially destabilising.

Approximately 85 per cent of the trader-quarter observations examined by SEBI were loss-making. Only around 15 per cent were profitable. This suggests that losses were not confined to one terrible annual result or a single market shock. They appeared repeatedly across shorter periods.

Why do traders return after repeatedly losing?

The SEBI studies identify the behaviour but do not reduce it to a single psychological explanation. Among traders who lost money for two consecutive years and continued participating, approximately 90 per cent lost again in the third year.

Repeated participation may be driven by several factors: the hope of recovering previous losses, confidence produced by occasional winning trades, the low visible entry price of options and the speed with which positions can be opened through trading apps. A profitable day can feel more memorable than a long series of smaller losses. Traders may also treat earlier losses as proof that they need a better strategy rather than evidence that the product itself may be unsuitable for them.

But SEBI’s persistence data strips away the comforting idea that experience automatically produces profitability. For most traders who repeatedly lost and stayed, another year in the market delivered another loss.

Have SEBI’s restrictions worked?

They appear to have cooled participation and reduced aggregate losses, but they have not transformed the odds for individuals who continue trading. In October 2024, SEBI introduced measures intended to curb excessive speculation and improve market stability. The regulator increased the minimum contract value for index derivatives, restricted weekly expiries to one benchmark index per exchange, required upfront collection of option premiums and imposed additional safeguards around expiry-day risk.

The drop in active traders and new entrants suggests that the higher barriers and tighter framework affected participation. Yet the continued 87.7 per cent loss rate shows that restricting entry does not automatically make the remaining traders profitable.

Activity also remains heavily concentrated around expiry. SEBI found that 59 per cent of index-options turnover occurred on the expiry day itself, while around 75 per cent took place within one day of expiry. Those are precisely the periods when option values can move sharply and decay quickly, turning trading into an intensely time-sensitive wager.

Does the fall in participation mean India’s F&O frenzy is ending?

The frenzy has slowed, but it has not disappeared. India remains the world’s largest equity derivatives market by volume, Reuters reported. The number of active individual participants has fallen, but 78.6 lakh traders still operated in the segment during FY26.

The more important shift may be that millions of individuals have begun exiting after confronting repeated losses, while tighter rules are discouraging some new entrants. However, the core imbalance remains. Retail option buyers still dominate participation. Professional and algorithmic traders continue to capture substantial profits. Trading clusters around expiries. Transaction costs keep eroding capital. The market has become smaller. It has not become forgiving.

What is the clearest message for an individual trader?

The SEBI studies do not say that every individual must avoid derivatives or that no retail trader can earn a profit. They show something more useful: the overwhelming majority did not. Nearly nine in 10 lost money. Option buyers produced particularly weak outcomes. Greater trading intensity was linked to greater losses. Transaction costs consumed ₹25,000 crore in a single year. And traders who repeatedly lost were overwhelmingly likely to lose again if they continued. The most dangerous misunderstanding may be treating an option’s low premium as the full measure of its risk. A trade can look inexpensive while the habit becomes ruinously costly.

(With inputs from ANI)