View: How not to make a bad situation worse in a falling market

The butterfly strategies would have made a lot of money with little chance of the index skipping the sweet spot of the butterfly and opening gap up/down.

Traders started to break the wings of butterflies to amplify returns. We even know of those who just resorted to shorting naked puts assuming that if the market fell a bit, the loss would not be too much. The problem is that the market did not fall a bit but big and it fell fast.

While India VIX has been on an upward march, it fails to take into account the number of gap up/down opening days. Feb – May 10, 2022, has seen gap up/down openings 16 times while the number of gap up/down openings in the whole of 2021 was only 15. This is more reminiscent of 2020 which saw 49 trading days that had gap up/down openings.

In these uncertain times, for traders who do not have access to massive pools of capital, it is best to take a backseat or at least consistently follow a single strategy. While most traders try to change strategies to improve returns, it often makes sense to let a strategy bide its time. Not all strategies win all the time. It is important to understand the classification of the market and deploy accordingly.

If you have lost massively on a smallcap portfolio, have the patience to bide out the cycle. If you book your losses and move to largecap when the market goes up, the returns will be much lower. You will feel even worse if you cash out and deploy the money into low-yielding debt hoping to buy some peace of mind. The FOMO will just be unbearable then.

If you are a derivatives player, always estimate your Value at Risk, and see that it is within your tolerance zone. Do not try to recoup your losses in a week.