Why 90% of Investors Make Losses in Derivatives
The derivatives market has always fascinated investors with its potential for high returns, fast trades, and low capital requirements. But behind the thrill lies a harsh reality—nearly 90% of individual investors lose money in derivatives trading. This isn’t due to bad luck or occasional poor choices. It’s a pattern driven by a range of factors: psychological, technical, and structural.
In this blog, we’ll break down the reasons why most retail traders struggle in derivatives markets, using relatable examples from the Indian financial ecosystem, and offer insights into how you can avoid these common traps.
What Are Derivatives?
Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks (like Reliance or TCS), indices (like Nifty or Bank Nifty), commodities (like gold or crude oil), or currencies (like USD/INR).
The most commonly traded derivatives in India are futures and options (F&O). They are used for both hedging (risk management) and speculation (profit-seeking).
1. Leverage: A Double-Edged Sword
One of the main attractions of derivatives is leverage—you can take a large position with a relatively small margin. But this is also the number one reason why people lose money.
Example:
You have ₹2,00,000 and decide to buy ICICI Bank futures, where 1 lot equals 700 shares and the total value is approximately ₹10 lakh. But with leverage, you can enter the trade with just ₹2 lakh as margin. If ICICI Bank falls just 1%, you lose around ₹10,000 instantly—which is 5% of your total capital.
Leverage magnifies both profits and losses. Most investors get wiped out after a few bad trades simply because they over-leverage and can’t handle even minor price fluctuations.
2. Lack of Understanding of the Product
Derivatives are complex instruments. Concepts like time decay (theta), implied volatility (IV), delta, and margins are essential to trading successfully. Unfortunately, many new traders enter the F&O segment with limited understanding.
Example:
An investor buys a Bank Nifty weekly call option for ₹200, expecting the index to rise. But even after a mild upward move, the option drops to ₹120 due to time decay and lower volatility. The trader is confused because the market moved in their direction, yet they still lost ₹80 per lot.
This happens often. Without deep product knowledge, even a correct prediction can result in losses.
3. Emotional Trading and Lack of Discipline
Trading requires emotional control. Fear and greed are constant companions in the derivatives market, and they cloud rational thinking.
Example:
Suppose you short an Infosys futures contract, expecting it to fall after poor quarterly results. The price initially rises slightly due to market noise, and you panic and square off your position at a loss. Later, the price falls exactly as you predicted. The fear of losing more makes you exit early—this is a classic emotional trap.
Most traders lack a plan and let emotions drive their trades, which is a recipe for consistent losses.
4. Overtrading and the Gambling Mindset
Many people treat the derivatives market like a casino. They take frequent trades in hopes of hitting the jackpot.
Example:
A trader enters and exits 8–10 positions daily in Bank Nifty weekly options, hoping for a quick ₹2,000–₹5,000 profit each time. This kind of overtrading leads to mounting brokerage, taxes (STT, exchange fees), and mental fatigue. Eventually, one bad trade wipes out days of gains.
Trading without a clear edge is like flipping a coin—and the house (broker and market makers) always wins.
5. Poor Risk Management and No Stop-Loss
Successful traders focus on how much they can lose, not just how much they can gain. Most retail investors ignore this crucial aspect.
Example:
You buy 2 lots of Reliance call options for ₹100 each. The stock drops, the option starts trading at ₹40, but you hold on, hoping for a bounce. Eventually, it goes to ₹0. You lose ₹12,000 (₹100 × 2 lots × 60).
Had you used a stop-loss at ₹70, you would’ve limited your loss to ₹6,000. Many retail traders blow up their entire capital in a few trades just because they never cut their losses.
6. Trading Against Professionals
The retail investor in India is usually trading against institutional investors, hedge funds, and market makers who have superior tools, algorithms, and insights.
Example:
Institutions often sell options (they are the option writers), knowing that most options expire worthless. Retail traders, on the other hand, love buying cheap weekly options hoping for quick money. The odds are naturally tilted against them.
Institutions also manipulate option pricing through volatility and order flow, further trapping inexperienced participants.
7. Unrealistic Expectations and Social Media Hype
Many traders enter the market with dreams of doubling their capital in a week. Much of this is influenced by YouTube, Telegram groups, or influencers posting screenshots of profits.
Example:
A trader sees someone claim, “I turned ₹20,000 into ₹1 lakh in 5 days trading options!” What you don’t see is that the same person may have lost ₹2 lakhs in the last month.
These cherry-picked results create unrealistic expectations, causing new traders to take unnecessary risks and ultimately lose money.
8. Ignoring Broader Market Trends and News
Macro events, RBI announcements, Fed decisions, crude oil prices, elections—all affect the markets. Retail traders often ignore these.
Example:
On RBI policy day, a trader buys Bank Nifty puts expecting a rate hike. But the RBI surprises the market with a dovish tone. Bank stocks surge, and the puts crash by 80% in minutes. Lack of awareness about macro trends leads to such catastrophic trades.
Understanding the context is as important as analyzingi the chart.
9. Broker Incentives and Platform Design
Some brokers push derivatives aggressively because they earn more from frequent trades. They may offer zero brokerage plans, fast platforms, and app-based trading—but all designed to increase trading activity, not improve outcomes.
Example:
A trader receives messages like “Nifty is ready to break out—buy calls now!” directly from the trading app. These nudges push emotional trades. Remember, more trades = more money for the broker.
Conclusion: Surviving Derivatives Requires Skill, Not Luck
Trading in derivatives is not easy money—it’s a high-risk, skill-based endeavor. The 90% loss rate isn’t a myth; it’s a reflection of how ill-prepared most retail traders are.
However, you can be among the 10% who survive and succeed by:
- Educating yourself thoroughly (learn options Greeks, strategies, risk management)
- Practicing on paper or demo accounts before using real money
- Using proper position sizing and stop-loss orders
- Controlling emotions and avoiding revenge trading
- Treating trading as a business, not a gamble
Final Word:
Derivatives are powerful tools. In the hands of the untrained, they are dangerous weapons. But in the hands of the disciplined and knowledgeable, they can be profitable instruments. Don’t aim to get rich quick. Aim to get rich smart—one well-managed trade at a time.