The F&O Loss Syndrome: Incentivize ‘Spread’ to save all stakeholders

• SEBI report says that 9 out of 10 retail traders incur loss in F&O.
  • Clamping on retail F&O trade will affect revenue of Exchanges, Brokers and the Govt.
  • Increasing STT rate through Budget 2024 may boost Govt. coffers but extend loss of retail investors.

Here is a simple solution to this complex problem.

The stock market regulator SEBI may choose to put a ban on naked F&O position and incentivize ‘Spread’. This measure will not only save the retail traders from incurring losses, but also boost the revenue of the Exchanges, Brokers and the Government. Above all it will double the volume of F&O segment.

What is ‘Spread’? Spread means spreading leg between two positions. For example, if you are buying a call of certain strike price and selling the call of another strike price simultaneously, you are making a spread. There are various ways of making Spreads. ‘Spreads’ is a type of strategy which puts a cap on loss and heightens probability of profit.

Trading software suggesting such spreads can easily be developed. The software must show the maximum loss/gain associated with the spread positions. In any case Buy/Sell of naked options should be banned completely. Some brokers have already developed similar software.

The “Hero-Zero” trade suggestions should be banned completely. This makes stock market a ‘satta’ bazar, a place for gambling. It is shameful. Stock market is legitimate ad regulated avenue of wealth creation. Converting it in a casino will rob the Exchanges of its glory.

This measure will benefit Exchanges because of increased turnover. It will benefit Brokers because every option position will have two legs resulting into double brokerage. It will benefit the Government because of increase in STT and GST revenue. Above all, it will save retailers from making unlimited losses in F&O market.