The Reversification of Futures and Options – How India Lost ₹3.85 Trillion

₹3.85 trillion!
Now, that’s a very large number.

It’s the total amount of money lost by retail traders while trading futures and options on stocks and their indices in the last five years. 

The following table plots these losses along with the number of retail traders (on the right hand side). 

Source: Rajya Sabha Unstarred Question No. 2633, Answered on August 11, 2026.

As can be seen, as the number of traders has gone up, so have the aggregate losses.

In 2024-25, the total number of retail traders stood at 9.81 million with losses of ₹1.12 trillion.

In 2025-26, the number of retail traders fell to 7.86 million and the aggregate losses to ₹916.85 billion.

Interestingly, the average per person loss in 2024-25 had stood at ₹113,913. It jumped to ₹116,654 in 2025-26.

Dear reader, if you are the kind who follows the pink press regularly, you would have read this by now. Nonetheless, there are a few important points which still need to be made.

Hedge Reversed
In Power and Prediction – The Disruptive Economics of Artificial Intelligence, Ajay Agrawal, Joshua Gans and Avi Goldfarb talk about something known as a hedgerow – a careful planned set of robust trees and plants that serve as a wall between fields.

It is especially useful if your field is full of farm animals and you do not want to employ someone to keep them from wandering off. It can also help prevent heavy rainfall from eroding the soil too quickly and protect crops from strong winds.

Interestingly, the hedgerow was the origin of the term “hedging” which is used extensively in finance and economics. In simple English, hedging means protecting yourself against a risk or loss.

Financial derivatives – like futures and options, at least as they are defined in textbooks – are an example of hedging. They are supposed to allow you to protect yourself against the risk of prices moving against you.

For instance, if you own a stock and fear its price may fall, you can buy a put option by paying what’s known as a premium. This gives you the right to sell the stock at a pre-decided price. If the stock price falls below that level, you can still sell it at the pre-decided price, thereby limiting your loss. That is the hedge.

That’s how financial derivatives – like F&O – are supposed to work, in theory, in textbooks.

But there is a huge difference between textbooks and real life.

John Lanchester in How to Speak Money coined a term called “reversification”, which he describes as an evolutionary innovative process in which words come “to have a meaning that is opposite to, or at least very different from, their initial sense.”

As he writes: “The word 'hedge' began its life in economics as a term for setting limits to a bet… At its simplest, a hedge is created when you make a bet, and at the same time make another bet on the other side of a possible outcome.”

The idea is that while you may give up some potential gains, you are also protecting yourself from losing money. For instance, if you own a stock, you can buy a put option on it to protect yourself against a fall in its price. Of course, you need to pay a premium to buy the put, and that is the cost of the hedge.

But the term doesn’t really mean what it used to when it comes to the field of economics and finance. Most hedge funds aren’t really hedging. They take on a lot of risk to generate returns; which is why so many tend to go bust. In that sense, the way many hedge funds operate is exactly the opposite of hedging.

Similarly, futures and options, are no more about hedging – they are simply about taking a punt. Making a gamble. And the data in the Indian case clearly shows that.

As a recent study titled Profitability of Individual Traders in the Equity Derivatives Segment (2024-25–2025-26), points out: “Derivatives trading activity substantially exceeded underlying portfolio value across all categories.” Which basically means that much of this derivatives activity is taking place without a corresponding portfolio of stocks to hedge.

In fact, the gap between the value of the equity portfolio in comparison to the derivatives turnover was the widest for small-portfolio traders. As the study points out: “Their average equity portfolio was only about ₹10,000, while average derivatives turnover exceeded ₹1.7 crore (₹17 million) – about 1,665 times their portfolio value.”

Further, traders with equity portfolios below ₹100,000 accounted for 78% of all traders, but held only around 1% of the total equity portfolio value. Despite their tiny share of equity holdings, they accounted for around 70% of aggregate losses in 2025-26.

This leads the study to conclude: “Derivatives participation… is largely disconnected from ownership of the underlying securities, and is therefore more consistent with speculative trading than with hedging.”

What Lanchester termed as the reversification of finance and economics is clearly visible in India’s futures and options data. 

Winners, Losers

So, who benefits from this?

From 2021-22 to 2025-26, the government earned a total securities transaction tax of around ₹800 billion from futures and options trading.

In 2025-26, the National Stock Exchange  earned over ₹166 billion as revenue from operations. Around 70% of this came from transaction charges on futures and options. This obviously plays a major part in the valuation that NSE is likely to get in its upcoming IPO.

In 2025-26, proprietary traders made a gross trading profit of ₹440 billion whereas foreign portfolio investors made ₹140 billion. Almost all of these profits were made through algorithmic trading.

Stock brokers, often backed by venture capitalists, may not necessarily be making a profit but they have definitely managed to get many people to start trading, and that has helped them with high valuations.

Then there are financial influencers who for a few years benefitted from affiliate deals offered by stock brokers in order to encourage their followers to trade.

Who loses?

Those not making much money to begin with — traders earning an annual income of below ₹500,000 — accounted for 53% of total net losses in both 2024-25 and 2025-26. Further, on average, every 88 out of 100 such traders, lost money in 2025-26.

Also, many of these traders are young. What this tells us is that these individuals are looking at futures and options as a side hustle, hoping to make quick and easy money – and failing.

Losses of ₹3.85 trillion over five years also raise an important question about their impact on household consumption and financial savings. To give a sense of comparison Hindustan Unilever Ltd.’s sales, over the last five years, amounted to a little over ₹3 trillion. 

The losses are money that is moving from India’s not so well to do households to the rich.

Ultimately, it leaves us with the moral question – what societal problems are these financial derivatives actually solving? Indeed, are they solving any problem at all?

Or have they just made it easier for the average individual carrying their smartphone 24/7 to punt in the hope of making quick and easy money?

Further, are they just building in risks into the financial system that did not exist to begin with?

The irony is hard to miss. Finance created derivatives to help people hedge risks. We have now turned them into instruments for taking risks. And the people taking those risks are often those least equipped to bear the losses.

That is reversification in its purest form – and India is paying for it.