The move by the Nairobi Securities Exchange (NSE) to introduce options is great timing for a number of reasons.
One, derivatives is the only financial market segment currently enjoying exponential growth. As at the end of last year, the number of exchange-traded derivatives contracts (including both options and futures), reached their highest level in the last three years, amounting to 104 billion for options and 30 billion for futures (134 billion derivatives contracts traded), according to the World Federation of Exchanges (WFE).
Two, the increasing interest in derivatives is mostly driven by options, which rose 89.4 percent (and accounted for 77 percent of all derivatives contracts traded), according to WFE. Notably, stock index options and commodity options recorded three digit increases of 130 percent and 135 percent, respectively.
Three, the move coincides with the so-called “Rise of Retail” as a result of digitalisation rising mostly from the pandemic lock down.
No doubt, today’s global retail traders are ready for the next layer of building their portfolios, incorporating options to protect the investments they have and potentially grow their wealth.
As an asset class, options have evolved from a small category to a major piece of the trading ecosystem and used by people all over the world. But there’s one problem; retail losses linked to derivatives trading are staggering.
A good example is a recent study by the Securities and Exchange Board of India, which is the biggest derivatives market in the world, noting that retail investors lost a whopping Sh2.7 trillion trading futures and options in just three years — that’s equivalent to the total market capitalisation of the NSE.
Same study showed that a mere 7.2 percent of the retail traders made a profit in the derivatives segment. In other words, over 90 percent lost money to institutional and foreign investors.
Now, I have highlighted here in the past the need for the regulator to curb excessive leverage to make the industry sustainable. I won’t go there today but rather spotlight the need for thorough education.
While online forums, resources and mentorship programs can sometimes provide retail investors with the basics, they need deeper instruction to succeed (especially with options trading).
Usually, if things go well, the payoff is huge, but in a lot of cases there’s no payoff and investors lose 100 percent of their investment.
Hence, my appeal for comprehensive market education to go along this new market if only to help level the playing field and increase the odds for retail investors to find success.
This way, if one wants to trade options, they’re supposed to be able to prove that they know what they’re doing, that they’re sophisticated enough to handle the risks. Otherwise, traders are most likely to make wealth-depleting mistakes.
Yes, we’ve come a long way toward making markets more accessible. Contrast for differences (CFDs), Day Trading, Futures Trading, and now Options.
Curious to see what kind of options NSE will unveil; weekly Index-linked options? Zero dated ones? Options on futures?
Whatever the case, the big question is: what’s the benefit of all this growth if it only relies on clueless counterparties and gambling tendencies of the trading masses? The least we can do is to allow them to step inside the trading ring fully armed with the know-how.
Mwanyasi is MD, Canaan Capital
