India’s options market faces a reality check

Hi, I’m Spriha Srivastava, executive editor for digital at CNBC International. Welcome to this edition of Inside India. 

This week, I look at how the boom in India’s derivatives markets has brought a whole host of worries for retail investors, who are typically young and drawn in by the promise of quick profits.

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

Each weekday, CNBC’s “Inside India” news show gives you news and market commentary on the emerging powerhouse businesses, and the people behind its rise. Livestream the show on YouTube and catch highlights here. 

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A week ago, India’s markets regulator sent a strong signal by barring global trading firm Jane Street from participating in the local equities market. The move came with eye-popping details: a near $570 million profit freeze, allegations of index manipulation, and the suggestion that arbitrage trading strategies may have crossed the line.

But as the noise settles and the legal back-and-forth begins, the real story may lie elsewhere. This case offers a window into the structure and stress points of India’s options market and what happens when regulation, technology and retail enthusiasm collide.

Behind the rise in trading volumes is something far more fragile: a new generation of retail investors flooding into complex financial products, often with little experience and even less protection.

India’s derivatives market has grown rapidly. According to the Futures Industry Association, the country now accounts for nearly 60% of global equity derivatives volumes. On paper, this looks like a success story. In practice, it’s more complicated.

What sets this market apart isn’t just its size. It’s who is trading.

Nearly 11 million individuals traded equity futures and options contracts in the last financial year, according to SEBI. The vast majority were first-timers, often young, and drawn in by the promise of quick profits amplified on social media platforms and influencer accounts. Many use mobile apps, follow Telegram channels, or mimic strategies they don’t fully understand. This kind of behavior, market participants say, is becoming increasingly common.

SEBI data, based on a recent study of 9.6 million individual equity derivative traders, shows that more than 40% of these traders were under 30, and over three-quarters earned less than 500,000 Indian rupees, or about $6,000, per year, according to Reuters.

That means most participants are entering highly leveraged, risky trades with limited income buffers and little formal market training.

Analysts attribute this to momentum-driven strategies, often influenced by social media and Telegram groups. Rather than basing trades on company fundamentals or earnings outlooks, many investors appear to be reacting to market trends and peer activity — a pattern commonly associated with FOMO, or fear of missing out. The result is heightened exposure to volatility, particularly among inexperienced traders with limited risk buffers.

The options market has become a hotbed for this kind of high-risk, fast-paced trading, especially with the rise of weekly expiries, which are short-term contracts that expire every week. These options are cheaper and more accessible, but also much riskier because they can swing wildly in value within days or even minutes.

Financial influencers on YouTube and other platforms are helping fuel this trend, guiding millions of retail traders in India. The focus is often on speed and volume — buying and selling quickly to chase short-term gains.

Many of these investors are trading daily and using strategies that can unravel fast. If the market moves even slightly against them, they can lose everything. While this kind of trading pushes up total market activity, it also raises the chances of large losses.

And that’s exactly what’s happening.

According to SEBI, over 90% of retail futures and options traders in its study lost money last year. Losses amounted to 1.06 trillion rupees, or roughly $12.5 billion, a 41% increase from the year before.

But this isn’t just about individual traders losing money. It creates a bigger problem: when so many investors make emotional or poorly timed bets, it opens the door for professional firms to take advantage, legally and efficiently. These institutional players have better tools, faster systems, and more experience, giving them a clear edge.

That’s the backdrop that makes the Jane Street case so significant.

SEBI has accused the firm of manipulating index prices to profit from options trades. Jane Street denies this, saying it was using a standard arbitrage strategy, a common and legal tactic among professionals.

While the case is ongoing and remains under regulatory review, with SEBI yet to issue a final ruling, the incident shines a light on the growing gap between retail traders and big institutions. It also raises a key question: Is the market becoming too driven by hype and short-term momentum?

If so, what happens to the role of fundamentals, the actual performance and value of companies, in determining prices? And can everyday investors still trust that the system is fair?

SEBI is in a tricky position. It wants more people to enter the markets, and more global firms to invest in India. But it also has to protect retail investors from being overwhelmed or exploited.

To that end, SEBI has taken some action, including on minimum trade sizes, requiring better risk disclosures and it’s considering banning weekly expiries on individual stocks.

But the core challenge remains: how do you grow a fast, exciting market without making it dangerous for newcomers?

India’s derivatives boom is a remarkable story of financial inclusion and technological scale. But scale alone isn’t a success metric. As the market matures, it will be judged not just by how many people participate, but by how many can do so sustainably, without being set up to fail.

What happens next won’t just shape India’s financial future. It may serve as a cautionary tale for other markets facing the same growing pains.

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Meera Shankar, former Indian ambassador to the U.S., said that the BRICS bloc, of which India is a part, is not “anti-American,” pointing out that constituent countries have different foreign policies.

Meanwhile, Chetan Seth, Nomura’s Asia-Pacific equity strategist, said that Indian stocks’ high valuations were the biggest deterrent for foreign investors, who have been underweight on the country’s market. 

Need to know

The Indian government ordered X to block 2,355 accounts. The Elon Musk-owned social network said Tuesday that the country’s Ministry of Electronics and Information Technology demanded on July 3 that Indian users be prevented from accessing thousands of accounts, including that of wire service Reuters.

Jane Street to contest ban on accessing Indian market. In response to the Securities and Exchange Board of India’s accusation that the firm was manipulating derivatives markets, Jane Street said it was conducting “basic index arbitrage trading.”

India is at the ‘top of the list’ for supply chain shifts. In an exclusive interview with CNBC TV18, Deutsche Bank CEO Christian Sewing said clients, regardless of size, are looking to India when reorganizing their production chains.

– Yeo Boon Ping

What happened in the markets?

Indian stocks traded lower on Thursday, with the Nifty 50 index 0.43% lower as of 12:30 p.m. local time.

The index has been consistently closing above 25,000 this month and has risen over 7% this year so far, according to data from LSEG.

The benchmark 10-year Indian government bond yield was flat at 6.315%.

– Lee Ying Shan

Coming up

July 14: CPI and WPI in June, food and health ingredients’ distributor Chemkart’s IPO, Airport F&B operator Travel Food Services’ IPO

July 15: Unemployment rate in June, pharmaceutical company Anthem Biosciences’ IPO

July 17: Office leasing firm Smartworks Coworking Spaces’ IPO