C.K. Chathrath, 58, Ujjain
Lost Rs 9.5 lakh in stock futures
• Has been investing in equities for 30 years and has made good profits.
• Lost Rs 9-10 lakh in the current meltdown after entering F&O.
• Was lured into F&O by high returns.
• Bought futures of momentum stocks.
• Don’t buy derivatives, buy shares. It ensures you don’t get too much exposure. If you own shares, you will not panic even if the value falls.
“The derivatives market is too risky and complicated for small investors. One has to constantly monitor the stock prices.”
Imran Jaleel, 44, Rampur
Lost Rs 1.5 lakh in the futures market
• Got into stock derivatives in 2005, lost Rs 1.5 lakh and quit in 2007.
• Invested in F&O market without understanding how derivatives worked.
• F&O market is like a casino where you lose more than you earn.
• Equities are not for a short term of 2-3 months. One should stay invested for at least 5-6 years.
“I consider myself lucky because I quit F&O early. In today’s market, I would have been bankrupt.”
On a larger scale, over-leveraging is being seen today as the root of global financial crisis. But small investors like Rampur-based Imran Jaleel aren’t looking at global movements; they want to get rich quick. Jaleel entered the F&O segment in 2005 and lost Rs 50,000 that year. Then, he sank deeper and lost over Rs 1.5 lakh in the next couple of years. He’s no longer in the segment and has learnt enough to know that had he been caught in the current crash, he would have been bankrupt. Then there’s Ujjain’s C.K. Chathrath. This 58-year-old has lost almost Rs 10 lakh in the current meltdown—thanks to his exposure to the F&O segment.
In a survey conducted on behalf of MONEY TODAY last month, more than 80% of the respondents in Delhi and Bengaluru and nearly 55% of all respondents said they had invested in equity derivatives. Almost 95% of the Delhi and Bengaluru respondents and over 80% of all respondents said they had lost money in the segment.
If derivatives and leveraged buying are so dangerous to the financial health of individuals, why do brokers push clients into buying them and why do exchanges allow them to be traded? Because they lead to more active markets and bring in trading volumes. To earn Rs 100-150 as brokerage, a relationship manager will not blink before advising his client to buy a futures contract that puts nearly Rs 40,000-60,000 at stake.
But then, stock exchanges are not philanthropic organisations. It’s every man for himself and the weakest or the most ignorant will inevitably be weeded out. Take the case of Ashok Mittal. The Delhibased executive invests in the futures market, but has no knowledge of options. “I just can’t get the hang of what these differently priced Calls and Puts mean,” he says. Not surprisingly, he too has lost money in F&O. Understanding options (MT Basics, page 49) could help him out of the derivatives maze relatively unhurt. Of course, options are not any less risky than futures. Almost 80% of all options expire worthless. Any investment in which you can lose 100% of your money can hardly be considered safe. It’s only that the amount of money at stake is considerably smaller compared with futures.
Sadly, while futures are widely traded, there is not much depth in the options market. Almost 95% of the options traded are Nifty options. Options of most scrips are just not available, defeating the very purpose of including the scrip in F&O.
Options are especially useful in volatile times. For instance, the price of Tata Steel fell from Rs 440 on 1 October to Rs 208 on 23 October. If someone had bought a futures lot (382 shares) at Rs 440 on 1 October, in three weeks, he would have incurred a loss of Rs 89,000. But if he had covered his position with a Put of Rs 400 strike price, which cost Rs 10 on 1 October, his losses would have been lower at Rs 19,000.
Savvy investors use strategies that combine futures and options to hedge their positions. You can use Put options to protect even your mutual fund investments. If the market falls and your portfolio takes a dent, the Put option makes up for the loss.
Apart from knowledge, options trading requires a lot of selfdiscipline. If you do not stick to the rules on when to buy and sell, the whole exercise can be fruitless, even financially devastating.
Cash and carry
F&O turnover has grown exponentially in the past eight years and overtaken the cash segment
Retail shareRetail investors account for the lion’s share in this rapidly growing segment
|Year||Average daily F&O turnover on NSE (Rs crore)||Average daily cash turnover on NSE (Rs crore)||Category||% of F&O turnover||% of cash turnover|
|* Till 30 September 2008 ||Figures are % of turnover on NSE|
What you should do now
• Don’t be tempted to invest in derivatives even if the stock price seems compelling. Stocks could fall even further.
• Derivatives are short-term products. Don’t go by research reports which take a long-term perspective.
• If you must invest in F&O, use a combination of futures and options to hedge your positions.