How lottery effect is making options trading popular

Many people are lured to buy lottery tickets for quick money. They spend lakhs despite knowing that their odds of winning are slim. Likewise, in the stock market, investors are drawn towards certain stocks as lotteries. The excitement of earning higher returns tempts investors to buy penny stocks with high beta and low prices. It's identical to how lottery players expect to win a fortune by putting in tiny sums.

What investors fail to understand is the sensitivity of owning lottery stocks. They present a very small probability of achieving a large payoff. These stocks are frequently the buzz of the town and are quick to respond to news and events, making them extremely volatile in the market. If the investments do not perform as anticipated, these lottery stocks can be a risky affair.

We are witnessing the same lottery effect in the options market too. We have seen a major shift in volume from the cash market to the options market in the last 7 years. This indicates a growing interest in highly leveraged instruments.

The data on the NSE shows that index options premium turnover has soared significantly in comparison to the turnover of the cash market segment since 2016-17.

Once greed takes over, traders turn to options trading as the investment required is small but the potential reward is large. However, the chances of retail investors making money in the options market are slim.

The recent Sebi study of traders in the Equity F&O Segment proves this. The number of unique individual traders in the derivatives market increased by over 500% in FY22 compared to FY19. Amongst all, 98% of them traded in options.

The detailed representation can be seen below….


More importantly, nine out of 10 individual traders suffered net losses in the equity F&O segment in FY22.

This shows that even though the turnover of the options segment has gone up several times, the profitability has reduced. Despite this, more and more retail investors are attracted to options because of the lottery effect.

One must always take calculated risks and stay away from lottery stocks or options if you don't understand them fully. Your mindset must be like a businessman rather than a lottery buyer. There are no shortcuts to success.

Technical Outlook

Nifty confirms a failed breakout and bears were in the driver's seat for the entire week and prices continued to close in the red for seven straight days. The index on the weekly chart has formed a tall red candle that has engulfed its previous three weeks' candles, which indicates presently bears are having an upper in the market.

The gap down opening on 22nd February has created a runaway gap at 17,775 levels on the daily chart and that unfilled gap will act as an immediate overhead resistance for the index. Index on the daily chart has slipped below its important averages (100 & 200 EMA), which indicates bears are in control.

Technically, the structure is shifting its momentum toward the bears, and the immediate support for the Nifty is placed at around 17,350 levels, which is the Budget day's low. In case prices drift below these levels, 17,050 – 17,000 will be on the cards. Only a sustained close above the 17,750- 17,800 zone is likely to trigger bullish momentum toward the 18,100 – 18,200 levels.

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