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

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 on a large scale can distort the market.

SEBI had acknowledged the challenge in a study, which found that 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 the number of contracts. The capital-market regulator, however, said that the losses remained even after announcement of the measures, according to its report.

Possibilities of speculation

The product entered its 25th year of existence in 2026 in the Indian market. A committee headed by L.C. Gupta in 1998 had recommended the 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. 

“Everything that we take for granted today in the cash market, they all started in the derivatives because there we were drawing on a clean slate,” Prof. Varma said in a conversation with The Hindu.

The report also addressed speculators in the market while setting up the structure. For an investor to hedge the volatility of their stocks, there has to be someone to take the opposite bet, and that person is usually a speculator. “Decisions about many aspects of derivatives trading would have to strike a balance between the needs of the hedgers and the necessity to attract an adequate number of well-capitalised speculators who are prepared to take upon themselves the price risk which hedgers want to give up,” the committee noted in its report. 

The recommendations contained in the report aimed at setting up a structure for the derivatives market to function and were largely implemented, which included putting in place strict entry barriers for intermediaries and brokers, among others.

New media, old warnings

The markets, however, evolved, and the growth of brokerage apps made it easy to speculate on complex instruments. The risk of mis-selling to uninformed clients became more likely with the proliferation of financial influencers promising unrealistic returns.

“With an explosion in index options trading on the expiry day over time, concerns arose around investor protection and systemic stability,” SEBI officials wrote in a white paper that compared cash with derivative markets, signalling that the balance the LCGC report mentioned may have skewed in favour of speculators at least in option contracts with short contract terms. 

There was a dissenting voice in the 1998-committee from the then BSE President M.G. Damani, who felt that “it would be dangerous to open the derivatives market to small investors in the beginning,” adding that the economy was not mature enough for it in the late 1990s. In the list of questions he posed to the committee before dissociating himself from the recommendations, he suggested that members be filtered by qualifying examinations and a net worth criterion. 

While brokers do undergo tight scrutiny, which was later strengthened, conversations have now shifted towards filtering retail traders, too, through suitability norms like a test. Recently, while speaking at an event in Mumbai, the Chief Executive Officer of National Stock Exchange (NSE) said that developing countries like India cannot let the lower strata of its people speculate and suggested a minimum qualifying criterion to even participate in the derivatives market, echoing Mr. Damani’s sentiments in 1998.

Mr. Varma is, however, unsure if such frameworks can help, as losing money in the options market could happen even with those with the knowledge. People ultimately learn and investment as a long-term goal is increasing in popularity. He further said that gambling behaviour has always existed and that it is the product that keeps changing, he said. Concentration of younger people rather than older people in the instruments is a saving grace as the former is resilient, he continued. 

Other markets across the world have had such speculative booms in their capital markets, and they were dealt with through a combination of frameworks, conditions or even strict surveillance.

It is impossible to curtail such behavioural risk, and therefore, regulation has shifted from changing behaviour to containing its consequences, said Jayesh H., co-founder of Juris Corp.

SEBI maintains that the problem exists only in short-tenure options and the impact of existing methods needs to be studied before making any further initiatives. Markets have evolved, and so have the investors, but Mr. Damani’s fears of widespread speculation coming out of small trader participation remain a challenge to regulators.

Published – March 21, 2026 07:33 pm IST