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Lesson 11 of 12 · Risk · 10 min read

Why most F&O traders lose - and the rules that help

धेरैजसो F&O ट्रेडर किन घाटामा जान्छन्? जोखिम व्यवस्थापनका नियम

Derivatives are a zero-sum game before costs and a losing game after them - for the average participant. The winners are mostly hedgers, market makers and the disciplined few. Here are the traps, and the rules that keep you out of them.

NEPSE doesn't allow futures and options trading yetToday you can't trade stock or index futures or options on NEPSE - Nepal's market is evolving, and the rules for these products are still to be made. This course is a detailed guide for the day the regulator (SEBON) allows them. Every NEPSE example here is an illustration with made-up contract sizes, not a real product. Nothing in it is investment advice.
हाल नेप्सेमा फ्युचर्स र अप्सन्स कारोबार गर्न पाइँदैन। नियामक निकायले भविष्यमा अनुमति दिएमा यो कोर्स तपाईंका लागि विस्तृत गाइड हुनेछ।

The uncomfortable arithmetic

Every futures and options contract has a buyer and a seller. Before costs, whatever one side wins, the other loses - F&O is a zero-sum game. Then come brokerage, taxes, exchange fees and the gap between buying and selling prices (the spread), paid on every trade by both sides. So for traders as a group the game is negative-sum. The people who come out ahead are mostly market makers who earn the spread, hedgers who wanted the protection anyway, and a small, disciplined minority. That's why SEBI keeps finding about nine in ten individual traders losing (lesson 10).

The five traps

1. The lottery ticketA NABIL 600 call a month out might cost about Rs 1 a share - Rs 500 a lot. "Cheap!" But its delta of about 0.08 says it has roughly a one-in-twelve chance of even finishing in the money, let alone above break-even. Buying these again and again is a slow, steady way to give money to the sellers - with the occasional win that keeps you coming back.
2. Selling options for "regular income"The mirror image: sell far out-of-the-money options and collect small premiums month after month. It works - until the month the market gaps 15%. One bad month can take back years of premiums, and a naked short call has no ceiling at all.
3. Expiry-day gamblingOn expiry day, near-the-money options swing from nearly nothing to many times their price within hours (high gamma - lesson 7). It feels like the fastest money in the world. India's regulator cut weekly expiries partly because this is where small traders lost most.
4. Too big, too oftenWith leverage, a "normal" position can be several times your capital. Two or three bad trades in a row - which happens to everyone - and the account is gone. Overtrading adds costs on every trade.
5. Doubling downAdding to a losing leveraged position to "average the price" is what destroyed Barings. On margin, being early is the same as being wrong.

The maths of digging out of a hole

Losses and gains aren't symmetric. After a loss you need a bigger percentage gain just to get back to where you started:

−10% +11% −25% +33% −50% +100% −75% +300% −90% +900% lossgain needed to get back
The gain needed to recover from a loss. A 50% loss needs a 100% gain; a 75% loss needs 300%. Leverage makes the big losses easy to reach.

Rule 1: size by what you can lose, not by what you can borrow

Professional traders decide position size from risk, not from how much margin the broker allows. A common rule: never risk more than 1-2% of your capital on one trade.

Sizing an illustrative NABIL futures tradeCapital: Rs 5,00,000. Maximum risk per trade at 1%: Rs 5,000.
You buy the NABIL future at 552 and decide to exit if it falls to 542 - a Rs 10 stop.
Risk per lot = Rs 10 × 500 shares = Rs 5,000 → you can trade one lot - not the nine lots that Rs 5 lakh of margin would allow.
Ten losing trades in a row would cost about 10% - painful, survivable. At nine lots, the same streak would take about 90% of the account.

Rule 2: know the worst case before you enter

  • Prefer defined-risk positions - bought options and spreads (lesson 9) - where the maximum loss is known on the way in.
  • Write down the exit price - for a loss and for a profit - before you trade, and use stop orders where the exchange allows them.
  • Never sell naked calls. If you sell options at all, cap the risk with a bought option further out.

Rule 3: count the costs

Brokerage, taxes and the spread are charged on every leg of every trade. A strategy that "makes Rs 500 a week" on paper can lose money after a four-leg trade's costs. Check them first with the exchange's and your broker's fee schedules once Nepal publishes them.

A checklist before every F&O trade

  1. What exactly is my view - direction, size of move, and by when?
  2. Which contract expresses it, and how does it settle at expiry?
  3. What's the most I can lose? Is that under 1-2% of my capital?
  4. Where do I get out if I'm wrong? And if I'm right?
  5. What will costs and time decay take?
  6. If this goes against me tomorrow morning, can I meet the margin call without selling something I need?

See it live on MacroLens NP

Everything in this lesson, worked out on real NEPSE data for every listed company - inside the MacroLens NP desk.

See it live on MacroLens NP Track record → How our own signals did - including the losers.
Advertise here Reach Nepal's serious investors Your brand in front of people researching NEPSE stocks every day - brokers, banks, insurers, fintech, education. See the ad spaces →

Lesson summary

  • Before costs, every rupee one side gains, the other loses; brokerage, taxes and spreads make the average result negative.
  • Cheap out-of-the-money options feel like lottery tickets - and mostly expire worthless, losing to time decay.
  • Selling naked options wins small and often, then loses big - one bad month can erase years of premiums.
  • Size positions by what you can lose (1-2% of capital per trade), decide the exit before entry, and never add to a loser on margin.

Check yourself

3 quick questions. Pick an answer for each, then check.

Q1 Why is F&O negative-sum for traders as a group?
Q2 You have Rs 5 lakh. A sensible maximum loss on one trade is about:
Q3 The danger of selling far out-of-the-money options:

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Education only, not investment advice: nothing here tells you to buy or sell any share. Investing carries risk - you can lose money. Examples use made-up companies unless a real one is named.