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The Dark Side of the Indian Options Market 🌑

Did you know that last year, India accounted for ~85% of all equity option contracts traded globally? It’s not just India’s retail investors who are heavily betting their money away, but also global hedge funds.

Difference though is that the hedge funds are actually making money, while retail investors are not!

What Happened?

A recent courtroom drama in the US, between two hedge funds - Jane Street Group and Millennium Management brought the Indian options trading market in the spotlight.

Basically, Jane Street sued two of its former employees who moved to rival Millennium Management, for taking a lucrative strategy with them.

Documents from the case revealed that Jane Street made US$ 1 billion in profits last year by trading equity options in the Indian markets, of the total US$ 10 billion it made in trading profits.

Why Should You Care?

Since 2019, the number of retail investors in the Indian markets have tripled, thanks to easy-to-use trading apps, the rise of training content, and of course the unidirectional bull market.

Retail investors account for nearly 35% of option trades in India, and it is estimated that 90% of these active retail traders end up losing money on derivatives.

It does make sense that novice retail traders don’t stand a chance against hedge funds deploying the best quantitative professionals and paying them millions of dollars to deploy high frequency trading strategies and raking in billions in profits.

What Next?

With Jane Street’s big bet uncovered, and the quantum of gains exposed, it came to light that multiple other hedge funds like Citadel, IMC and Optiver have been trying to strengthen their India desks.

As more sophisticated institutional investors jump on to the immensely liquid and incredibly cheap market, outsized profits may run out, and retail investors are likely to continue remaining disadvantaged.

However, the fact that India is an attractive investment destination remains. After all, social, political, economic, regulatory and demographic factors are all aligned in favour of India’s bull run to continue.

The better way for retail investors (with limited know-how on derivatives) to benefit out of this opportunity would be by keeping their sight on the long run and staying invested, rather than falling prey to short term greed!

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