Traders shocked by extent of April 7 fall, cut exposure to a fraction

Many traders who had bought cheap OTM options so as not to take their quarterly payout suffered huge losses.

Although market participants had been expecting a fall on April 7,  many were surprised by the extent of it, and were rattled by the spike in volatility. Traders said they plan to cut their exposure to a fraction until clarity on global events such as tariffs and counter tariffs emerges.

This week began with the mainboard indices opening gap down by close to five percent percent and then ending around 3 percent lower than the previous close. India VIX (Volatility Index), a measure of volatility, had shot up by close to 65 percent in a single day.  

Many traders Moneycontrol spoke to said that they had been surprised by the steepness of the fall and the sudden recovery in the last one hour of trading on April 7.

Jitendra Jain, a veteran trader, said that he had a no-trade day on Monday after seeing Friday's market close low. But he said that many traders who had avoided the quarterly payout on Friday had sold cheap out-of-the-money options and they have taken a massive loss.

Brokers are supposed to transfer unused funds back to the clients' bank accounts on quarterly payout cycles, which this month fell on April 4. Making these payments into the banks can be an operational hassle,. So, if there are larger sums involved, traders sell options. But this workaround proved to be big misstep in this volatile market.

Another veteran trader, who did not want to be named, said that one person had to take a loss of close to Rs 50 lakh because of this.

Jain plans to deploy only 25 percent of his capital in the coming days and Rajesh Sriwastava, another veteran trader, only 10 percent. "There is too much uncertainty," Sriwastava said, adding, "unless there is a clear signal from the US that there will be a resolution to the tariff stand-off, this uncertainty will remain and we will deploying only a fraction of the capital".

Sriwastava, and a few other traders Moneycontrol spoke to, said that they were even surprised by the recovery the market made in the last one hour. Sriwastava said, "It could not be explained by anything since the global conditions were still uncertain."

He believes that a 90-day pause in US tariff rollout, which has been much talked about, could result in a relief rally but that still will not give him confidence to re-enter the market as before this correction.