Moneycontrol Pro Panorama | You have the option to lose money…or not! 

market

Dear Reader, 

The equity market of one of the fastest growing economies in the world is offering lip-smacking yearly returns and a promise for more. The upcoming national elections will add more fodder to consumption and general euphoria.

Is it any surprise that Indians can no longer resist putting their savings into a market that is being chased by big global pockets for two years now? Today’s investors of India are not the guaranteed return-seeking boomers or even anxiety ridden paycheck-counting middle agers but young millennials and Gen Z who have yet to see a debilitating economic downcycle or a crisis (the pandemic doesn’t count anymore).

December’s record high demat account additions is a fallout of this demographic. My colleague Ravindra Sonavane brings all the details Canara Bank. Will it sustain? The jury is still out but Indians are not backing away from dipping their toes into the stock market. Household savings have been lured by “mutual fund sahi hai” for more than a decade now and systematic investment plans (SIP) form an integral part of retail participation in equities today. Starry eyed by the bull run in equities and egged on by finfluencers on social media platforms, young Indians, even those living paycheck to paycheck, decided the stock market is where the real money is. And why not? The market is ridden with anecdotes of rags to riches (even riches to rags but no one notices these).

But within the equity market’s lap lies a different beast: the derivatives. In October, we were warned that derivatives account for 99.6 percent of the total equity market volume and index options contribute 99 percent of the derivatives volume by an Axis Mutual Fund report authored by Ashish Gupta. A stock option is a bet, not a hedge, that gives the trader an exposure that is a million times the size of the bet or contract.

Stock options offer unbeatable odds to make money but what they also hide is unparalleled risk. While retail participation in stock options at the aggregate level is not enough to upset the market, it is enough to ruin the trader and hence put off potential investors who could create wealth through sane long term equity investment.

Warnings shots were fired by the Securities and Exchange Board of India (SEBI), the watchdog of capital markets early last year but most of these have been just coddling of investors and telling them to please be careful. So far, SEBI has steered clear of any efforts to crimp this surge in equity trading and just ensured some guardrails are in place. As such, analysts believe that trading margins in India are more restrictive and higher compared with other markets.

In effect, the options frenzy is yet to reach a level where it may derail the gravy train of the cash market or worse grind the equities wheels to a halt. But what it has done is build unparalleled leverage. Leverage is lovely if it works towards creation of wealth but the other side of it is risk. Nine out of ten options traders made a loss, according to the regulator.

Indices have had a sobering start to 2024 but the undercurrent of expectations is huge. The US Federal Reserve is anticipated to begin rate cuts later this year, and national elections would give enough fodder for volatility in the markets. Ananya Roy’s piece today will help to wade through such waters.

For someone who is betting on options today, here is a wise line from Warren Buffet, “Risk comes from not knowing what you are doing.”

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Technical picks: PPL Pharma, REC, Canara Bank, and HCL Technologies(These are published every trading day before markets open and can be read on the app).

Aparna Iyer
Moneycontrol Pro