SAMCO’s Nilesh Sharma Simplifies Risk Management for F&O Traders

India’s financial markets are witnessing a paradigm shift, which is particularly evident in the dramatic rise of futures and options (F&O) trading in the country. This sector, once the domain of seasoned investors, is now attracting an increasing number of retail traders who are drawn by the allure of potentially high returns. 
 
However, while this influx may be indicative of a vibrant market, it also brings to the fore significant concerns about the high-risk nature of these trades and the relatively low success rate among participants. To navigate the risks inherent in futures and options trading, SAMCO Securities offers a proprietary, industry-first feature in its trading app. Aptly named ‘My Trade Story,’ this feature analyses billions of data points from past trades and gives traders personalised unseen insights or Andekha Sach, so they can mitigate the risks, hedge their positions and improve their F&O trading performance. 
 
A Closer Look at the Derivatives Market in India

The recent upsurge in F&O trading can be attributed to a confluence of factors. Notably, stock exchanges have restructured some options contracts to enable more efficient and cost-effective trades. Parallel to this, the rapid growth of online trading platforms has significantly democratised access to these markets. 
 
The result is a marked increase in the daily average value of assets underlying stock options — which has more than doubled between March and October to a staggering $4.2 trillion, as per exchange data. This spike in activity, however, is not solely driven by traditional investment strategies; it is also significantly fueled by a growing speculative trend within the markets.
 
However, this surge in trading activity comes with its caveats. Cognizant of the risks involved, the Securities and Exchange Board of India (SEBI) has adopted a cautious stance and issued warnings. Market analysts also echo these concerns, having observed that the surge in options activity is used more for speculative than for hedging purposes. This trend poses a risk of magnifying market volatility and can lead to steep financial losses, especially for inexperienced traders.
 
Speaking of the inherently risky nature of the futures and options segment, Nilesh Sharma, Executive Director & President of SAMCO Securities, explains how the risks and rewards match up. 
 
“While the F&O market offers substantial opportunities for wealth creation, it also demands discipline and a deeper understanding of market dynamics. The recent surge in participation from retail investors is encouraging, but it also necessitates a greater focus on spreading awareness about the inherent risks and how to navigate them effectively. For inexperienced traders without the right risk mitigation strategies, it can lead to substantial losses. However, with the right tools, traders can leverage the unique opportunities for hedging and leveraging positions in the F&O segment.”
 
Sharma further delves into how SAMCO Securities helps traders bridge the gap between the risks and rewards in F&O trading with post-trade analysis.
 
“Each trade offers valuable insights, and at SAMCO, our focus is on harnessing these unseen insights — or Andekha Sach as we call them — to enhance risk management in F&O trading. By meticulously analysing post-trade data, we provide traders with actionable feedback that directly impacts their future trading decisions. This approach is crucial for navigating the complexities of the F&O market.”
 
Sharma’s insights and SAMCO’s offerings are particularly relevant in the current era of F&O trading, which is dominated by younger retail investors aged between 20 and 30 years. Yet, the high-risk nature of these markets is evident in the fact that the top 5% of active profit makers accounted for the majority of the total net profits. This concentration of success among a small fraction of traders, coupled with the average loss of Rs 1.1 lakh among the majority who incurred losses, highlights the challenging and speculative nature of F&O trading.
 
Key Risk Management Strategies for F&O Traders

Trading in futures and options is accompanied by various uncertainties and risks that traders must navigate carefully. Market risk, stemming from fluctuations in asset prices, is one such uncertainty. It can significantly impact the value of positions held in these derivatives. Liquidity risk is another concern, where traders might find it challenging to enter or exit positions without substantial price changes. 
 
Leverage risk, also common in F&O trading, amplifies both potential gains and losses. Additionally, traders face counterparty risk as well, where the other party in the contract may default on their obligations. Addressing these risks requires a multifaceted approach that includes various strategies, as outlined below:
 

Diversification is crucial for reducing risk exposure in F&O trading. By spreading their investments across different asset classes, traders can minimise the impact of adverse market movements on their entire portfolio. This strategy helps in balancing the risk-reward ratio and increases the possibility of the performance of one investment setting off the losses in another.
 

Implementing stop-loss orders is another pivotal strategy for controlling losses in volatile F&O markets. These orders automatically close a position at a predetermined price — thus limiting the potential losses on a trade. By setting these limits for every open position in the derivatives market, traders can manage their risk exposure and prevent significant financial downturns from unexpected market movements.
 

Effective position sizing ensures that traders do not overexpose themselves in a single trade. It involves determining the appropriate amount of capital to allocate to each trade based on the overall trading capital, risk tolerance and prevailing market trends. This strategy is essential to prevent disproportionate losses and maintain a healthy trading account balance.
 

Hedging is an advanced strategy used to offset potential losses in F&O trading. This can involve taking an opposite position in a related asset or using derivatives like options to protect against adverse price movements. Effective hedging strategies help stabilise a trader’s asset portfolio when the market moves unexpectedly or contrary to the anticipated trend. This, in turn, reduces the overall risk exposure.
 
Managing Risk and Improving Trading Success in the F&O Segment with SAMCO Securities

For risk management strategies to be effective, traders require the right tools and insights. What’s equally crucial is that these insights need to be made available in a timely manner. SAMCO Securities has succeeded in striking this balance with ‘My Trade Story’ — a unique, industry-first feature integrated into its trading app. 
 
This feature gives F&O traders hidden insights about their trades, so they can assess their strengths, identify their weaknesses and take corrective action promptly. Nilesh Sharma explains why ‘My Trade Story’ is a game changer for futures and options traders across the country.
 
“In F&O trading, understanding your own trading behaviour is crucial for managing risk. ‘My Trade Story’ provides these details by meticulously analysing each trade. It helps identify which strategies are working and which are not, so traders can focus on profitable tactics while discarding or improving the less successful ones. 
 
For instance, if a trader repeatedly incurs losses in specific market conditions or with certain options strategies, ‘My Trade Story’ will highlight these patterns. This allows traders to either avoid such techniques or approach them with a revised strategy, thus reducing their risk exposure significantly. Ultimately, ‘My Trade Story’ equips traders to make data-driven decisions and sharpens their approach to each F&O trade. This leads to a more calculated and informed trading strategy, reduces unnecessary risks and enhances the potential for consistent profitability.”
 
Sharma is on the money about ‘My Trade Story’ being a powerful tool that significantly aids traders in the futures and options segment. Here are several ways in which it helps manage risks:
 

For F&O traders, understanding the outcome of each trade is crucial. ‘My Trade Story’ helps with this by providing a detailed analysis of every trade executed. This includes the success and failure of different strategies, whether in index options, stock futures or other derivatives. Such analysis helps traders learn from their past actions and makes it easier to differentiate successful strategies from those that carry higher risks.
 

In F&O trading, the strike rate — or the percentage of successful trades — is critical. ‘My Trade Story’ helps traders monitor their strike rate across different derivative strategies and categories. This information is vital in assessing the effectiveness of the strategies used under various market conditions. A higher strike rate in a particular segment, say index options, might encourage a trader to allocate more resources there, while a lower rate in another segment might signal the need for strategy revision or additional caution.
 

Understanding the average size of wins and losses is also pivotal in F&O trading. ‘My Trade Story’ breaks down these figures, so traders can evaluate the profitability of their strategies more easily. For instance, a trader might discover that while their overall strike rate is high, the average size of losses on failed trades is significantly larger than the wins. This insight can lead to strategy adjustments like setting tighter stop-loss orders or reducing position sizes in riskier trades.
 

The holding period or the duration for which positions are held is another critical factor in F&O trading. ‘My Trade Story’ analyses and presents data on holding periods to help traders understand their tendencies to remain in or exit certain positions. For example, if a trader tends to hold losing positions for longer periods in the hope of a market reversal, ‘My Trade Story’ highlights this pattern and encourages more disciplined exit strategies to minimise losses.
 
SAMCO’s ‘My Trade Story’ — A One-Stop Solution to Comprehensive F&O Risk Management

Harnessing the power of sophisticated analytical tools like ‘My Trade Story’ is pivotal for traders looking to refine their strategies and manage risks in F&O trading. This tool from SAMCO Securities stands out as a comprehensive solution for traders seeking to gain a deeper understanding of their trading patterns, successes and areas for improvement.
 
With features such as strike rate analysis, average win/loss size and holding period insights, ‘My Trade Story’ goes beyond basic trading analytics and offers a personalised view of trading performance. Moreover, the actionable insights provided as a part of the ‘My Trade Story’ feature further empower traders to make informed decisions about their trading strategies. This level of introspection and course correction is crucial in a market where every decision can have significant financial implications.

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