Nearly 90% Retail F&O Traders Lost Money In FY26. Why Do They Keep Coming Back?

Individual traders continued to lose heavily in India's equity derivatives market in FY26, despite a sharp decline in retail participation following regulatory tightening and a slowdown in speculative activity. Nearly 88%, or roughly 9 out of 10 individual traders, incurred losses during the year, according to a new Sebi study.

The proportion of loss-making traders declined only marginally to 87.7% in FY26 from 90.9% in FY25, even as the overall number of active individual traders fell sharply. Individual traders recorded aggregate net losses of around ₹91,685 crore in FY26, compared with approximately ₹1.12 lakh crore a year earlier.

The lower aggregate loss therefore does not necessarily indicate that trading outcomes improved substantially. Instead, the decline was largely driven by fewer people participating in the market. Active individual traders fell about 20% to 78.6 lakh in FY26 from 98.1 lakh in FY25, while the number of new entrants declined around 40%. At the same time, the average loss per trader increased marginally to around ₹1.17 lakh.

Why Are Retail Traders Still Losing Money?

Sebi's findings suggest that the core problem goes beyond the number of people entering the derivatives market. The behaviour of those who remain active continues to be heavily skewed towards speculative, short-duration trading.

Options were responsible for the overwhelming majority of retail losses. Around 92% of the aggregate losses incurred by individual traders came from options trading. At the same time, nearly 97% of traders primarily followed option-buying strategies, while only around 2% were classified as mainly options sellers.

Options sellers were the only strategy group to record positive median returns on capital employed in FY26.

The concentration of trading around expiry further highlights the speculative nature of retail participation. Around 59% of index options turnover came from contracts expiring on the same day, or ODTE contracts. Around 75% of turnover came from contracts expiring within one day, while 97% came from contracts expiring within one week.

The attraction is straightforward that options allow traders to control relatively large positions with a comparatively smaller upfront amount. But that leverage also means small movements in the underlying asset can rapidly magnify losses.

Pravesh Gour, Sr. Technical Analyst at Swastika Investmart, said retail investors continue to enter F&O because the promise of quick returns often outweighs their perception of risk.

"Derivatives require relatively low upfront capital, creating an illusion that large profits can be generated with limited money," Gour said, adding that social media, trading influencers, real-time market tips and easy-to-use trading platforms have made short-term speculation increasingly accessible.

Why Regulation Has Not Solved The Problem

Sebi has tightened the derivatives framework in recent years, with measures aimed at reducing excessive speculation and protecting retail investors. The impact is visible in participation data, with both active traders and new entrants falling significantly.

However, the latest study suggests that reducing participation alone has not fundamentally changed the behaviour of those who continue trading.

Gour said behavioural biases remain a major reason behind repeated losses. Overconfidence can lead traders to believe they can consistently predict short-term market movements, while FOMO can push them into trades after seeing others make money. Loss aversion can also encourage traders to hold losing positions or increase their bets to recover earlier losses.

Shiva Grover, Founder of Equitrust Solutions, said the asymmetric appeal of options - small capital outlay and the possibility of outsized returns - continues to draw retail investors, particularly towards expiry-day contracts.

"Sebi's data shows a strong skew toward ultra-short-duration, near-expiry contracts, reflecting more of a 'lottery ticket' mindset than genuine hedging or investment intent," Grover said.

He added that regulatory measures such as larger lot sizes, tighter position limits and fewer weekly expiries may have reduced participation and turnover, but may not fundamentally alter the psychological factors driving speculative trading.

More Experience Doesn't Mean Better Outcomes

One of the more striking findings from the Sebi study is that experience did not meaningfully improve outcomes.

Traders with several consecutive years of derivatives participation continued to record similarly high loss rates. Among traders who lost money for two consecutive years and continued trading, around 90% lost money again in the following year.

The pattern was also visible at the quarterly level. Around 85% of trader-quarter observations were loss-making, compared with only 15% that were profitable.

Even among traders who experienced both profitable and loss-making quarters, the average gains in profitable quarters were smaller than the average losses in losing quarters for nearly 79% of such traders.

This creates a difficult cycle: traders may occasionally make money, but the size of those gains is often insufficient to compensate for subsequent losses.

The data also suggests that many traders eventually quit after suffering losses. Between 28% and 40% of traders active in one quarter did not trade in the following quarter. Of those who stopped, around 86-89% had recorded losses in the previous quarter.

Smaller Investors Bear The Brunt

The losses are also disproportionately concentrated among traders with smaller financial portfolios.

Around 35% of individual derivatives traders had no equity holdings, while nearly 78% had equity portfolios below ₹1 lakh. These traders accounted for around 70% of aggregate losses despite contributing only about half of the total turnover.

Loss rates declined as portfolio size increased. Around 93% of traders with no equity holdings made losses, compared with 58% among traders holding more than ₹10 crore in equity portfolios.

The findings indicate that derivatives trading can be particularly damaging when the amount being risked is large relative to an individual's overall financial resources.

Who Is Making Money From F&O?

The profit pool remains tilted heavily towards institutional and professional participants.

Proprietary traders recorded the highest gross trading profit at around ₹44,000 crore, followed by foreign portfolio investors at ₹14,000 crore, corporates at ₹8,000 crore, mutual funds at ₹3,000 crore and partnership firms or LLPs at ₹3,000 crore.

Sebi also found that 99% of the profits generated by FPIs and proprietary traders came from algorithmic entities, highlighting the technological advantage available to sophisticated market participants.

Eshaan Lazarus, Founder & CEO of 021 Trade, said F&O becomes a negative-sum game for traders once transaction costs are taken into account.

"Retail traders often find themselves trading against institutions and professional participants with superior infrastructure, faster execution, and deeper capital," Lazarus said.

Individual traders paid around ₹25,000 crore in transaction costs in FY26. Over FY22-FY26, their cumulative transaction costs stood at around ₹1 lakh crore.

Why Do Traders Keep Coming Back?

The Sebi data suggests that losses themselves are not necessarily enough to discourage traders from returning to the derivatives market.

Social media can amplify this effect because successful trades are highly visible, while losses are rarely showcased. As Lazarus put it, the visible record of F&O trading can therefore appear dominated by winners.

Gour said FOMO, overconfidence and the desire to recover losses can encourage traders to increase their positions after unsuccessful trades. Grover similarly pointed to the sunk-cost fallacy, where traders continue taking risks because they believe the next trade can recover previous losses.

This may explain why participation has fallen without eliminating persistent losses among those who remain active.

The key challenge for regulators, therefore, may no longer be simply reducing the number of retail traders entering F&O. It is changing how those traders participate.

Greater financial literacy, clearer real-time risk disclosures, responsible communication by trading platforms and stronger product-suitability checks could become increasingly important alongside regulatory restrictions.