Picking up nickels in front of a steam roller…

Published on Sept 24, 2019.

This is what many retail investors got into doing since last couple of years. The investing metaphor became a reality on Friday. Selling far strike options gradually got a lot of favoritism among retail investors in last few years mainly due to the rise of discount brokerages which made such a trade viable, coupled with the absence of an extreme event and reduced volatility since last many years.

Needless to say, many retail investors involved in such trades cannot rightly appraise the risk of the occurrence of such a low probability event and would suffer huge capital loss when such events happen, just to make 4-5% extra annual yield.

SEBI has exactly been doing the right thing by almost doubling the margin requirement for such trades in last 1-year sensing proactively where the risk is being passed on. Such a margin requirement discouraged many retail investors to get into such trades or automatically reduced the total exposure for the ones involved. Here the role of a regulator is of a high essence and India is blessed to have a regulator like SEBI.