UPSC Prelims 2025 Q8: India's Equity Options Boom and SEBI — Explained

Consider the following statements:

I. India accounts for a very large portion of all equity option contracts traded globally thus exhibiting a great boom.

II. India's stock market has grown rapidly in the recent past even overtaking Hong Kong's at some point of time.

III. There is no regulatory body either to warn the small investors about the risks of options trading or to act on unregistered financial advisors in this regard.

Which of the statements given above are correct?

I and II only
II and III only
I and III only
I, II and III

Answer: (a) I and II only

Statement-wise explanation

I: correct — FIA data show that about 84% of all equity options traded worldwide in 2023 were traded on Indian exchanges. Equity index options on Indian exchanges reached about 84.3 billion contracts in 2023, up 153% from 2022. NSE was the world's largest derivatives exchange by contracts traded for the fifth year running. 'A very large portion' and 'a great boom' are both accurate.
II: correct — In January 2024 the total market capitalisation of Indian exchanges (about USD 4.33 trillion) passed Hong Kong's (about USD 4.29 trillion). India became the world's fourth-largest equity market for the first time. Indian market value had crossed USD 4 trillion on 5 December 2023, and about half of it was added in the four years before that. The words 'at some point of time' fit because the ranking went back and forth during 2024.
III: incorrect — The Securities and Exchange Board of India (SEBI) is the statutory regulator of the securities market under the SEBI Act, 1992, and it does both jobs the statement says no one does. It warns investors: its September 2024 study found about 93% of individual F&O traders lost money in FY22–FY24 (over ₹1.8 lakh crore in total), and brokers must show a risk disclosure on F&O losses. It also acts against unregistered advisers under the SEBI (Investment Advisers) Regulations, 2013, through warning letters, orders and the removal of thousands of unauthorised advice pages and channels.
I_note_ignore: incorrect —

How to eliminate

Statement III says no regulatory body exists 'either' to warn small investors 'or' to act on unregistered financial advisers. This is an absolute claim. Basic knowledge rules it out: SEBI has regulated India's securities market since 1992 and registers investment advisers. Once III is out, every option that contains III goes. That leaves only the option with I and II. You do not need to know the 84% figure or the Hong Kong ranking. Remember this pattern: in an Economy question, a statement claiming that 'no institution' or 'no mechanism' exists for a core market function is almost always false.

Know more

Equity options and why India's boom worries the regulator

An option is a derivative contract. It gives the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a fixed strike price on or before expiry. The buyer pays a small premium. That low entry cost and high leverage are what draw small traders to short-dated index options.

Feature	Futures	Options
Obligation	Both sides must settle	Only the seller (writer) is obliged
Upfront cost	Margin	Premium (buyer), margin (seller)
Buyer's maximum loss	Unlimited	Premium paid
Typical use	Hedging, directional bets	Hedging, leveraged speculation

The numbers behind the concern

In 2023, India accounted for about 84% of global equity options volume (FIA).
SEBI's September 2024 study found that about 93% of individual F&O traders lost money in FY22–FY24, a total of over ₹1.8 lakh crore.
The Economic Survey 2023-24 warned that derivatives trading suits investors poorly in a low-income economy and called for investor education.

SEBI's response (circular of 1 October 2024)

Minimum contract value for index derivatives raised to ₹15 lakh (contracts reset to ₹15–20 lakh at review).
Weekly expiry limited to one benchmark index per exchange.
Option premium collected upfront from buyers; intraday monitoring of position limits.

Advisers and 'finfluencers' Anyone who gives investment advice for a fee must register under the SEBI (Investment Advisers) Regulations, 2013. Anyone who issues research reports or recommendations must register under the Research Analysts Regulations, 2014. In 2024 SEBI also barred regulated entities from associating with unregistered persons who give advice or claim returns.

In the news

SEBI's September 2024 study found that 93% of individual F&O traders were losing money. SEBI tightened index-derivative rules in October 2024. Both came after the Economic Survey 2023-24 warned about speculative options trading and after India's market passed Hong Kong's in January 2024. The topic stayed in the news through the year before the 2025 Prelims.

NCERT Concepts to Revise

Securities and Exchange Board of India: Statement III turns on what this regulator's powers and duties actually cover.
Futures and options trading: Statement I is about the F&O segment, so you need to know what is traded there.
Derivatives: Equity options are derivatives; knowing what an underlying is explains why the volumes grow so large.
Hedging: Options were designed for hedging; seeing that purpose helps you judge whether a 'boom' means healthy use.
Herd behaviour: Herding helps explain why so many small traders crowded into options at the same time.