BharatNotes What is Derivatives (Futures and Options)?
A derivative is a contract whose value is derived from an underlying asset — a share, an index, a commodity, a currency or an interest rate. Under Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 (SCRA), a derivative includes a security derived from a debt instrument, share or loan, and a contract that derives its value from the prices (or index of prices) of underlying securities. In India, exchange-traded derivatives are regulated by SEBI and traded mainly on the NSE and BSE.
The two most traded instruments are futures and options (collectively "F&O"):
| Feature | Futures | Options |
|---|---|---|
| Nature of contract | Obligation to buy/sell on a future date | Right, not obligation, to buy/sell |
| Parties' commitment | Both buyer and seller are bound | Buyer has the right; seller (writer) is obligated if exercised |
| Upfront payment | Margin | Premium paid by buyer to seller |
| Types | Index futures, stock futures | Call (right to buy), Put (right to sell) |
Why Derivatives Matter
Derivatives perform two genuine economic roles: hedging (a farmer, exporter or investor can lock in a price and transfer risk to a willing counterparty) and price discovery (futures prices signal market expectations). Because they are leveraged — a small margin controls a large position — they also magnify both gains and losses, making them attractive for speculation.
Current Status: SEBI's 2024-25 Reforms
A SEBI study (press release dated 23 September 2024) found that 93% of individual traders incurred losses in equity F&O between FY22 and FY24, with aggregate net losses exceeding ₹1.8 lakh crore over the three years; in FY24 alone individual traders lost around ₹75,000 crore. To curb excessive retail speculation, SEBI issued a circular on 1 October 2024 ("Measures to Strengthen Equity Index Derivatives Framework") introducing six measures, rolled out in phases:
- Minimum contract value raised to ₹15 lakh (lot size set so contract value stays within ₹15-20 lakh on review), up from the earlier ₹5-10 lakh band.
- Upfront collection of option premium from option buyers.
- Weekly expiry limited to one benchmark index per exchange (effective 20 November 2024).
- Extreme Loss Margin of an additional 2% on short options on expiry day (from 20 November 2024).
- Removal of calendar-spread margin benefit on expiry day (from 10 February 2025).
- Intraday monitoring of position limits (from 1 April 2025).
These steps aim to raise the cost and lower the casino-like appeal of short-dated index options. (All figures and dates as per SEBI, 2024-25.)
UPSC Angle
For the exam, focus on the right-versus-obligation distinction between options and futures, SEBI's statutory authority under SCRA, 1956, and the investor-protection versus market-development tension that the 2024-25 reforms embody. Link it to household financialisation, financial stability and the diversion of small savings into speculative trading — a recurring GS3 economy theme.
