We know that cash carry trade is a reality in the global financial order. Big players borrow money from low interest nations and invest it in higher interest bearing nations. This provides a cash carry arbitrage. Due to the Indian options markets being the largest in the world, we are now attracting the “big boys” from the west who are savvy, deep pocketed, have access to cutting AI, algos and trading skills.

These yield sensitive traders will come in droves and compete with each other for above average returns (benchmarked to western markets). As they settle for progressively lower yields (which are still way higher than western yields), the average Indian retail trader will see his take home profits shrink noticeably.

The other aspect is even more noteworthy and is pronounced due to its impact on the options premia pricing.

We have been so used to banking on the implied volatility as a yardstick for measuring volatility that we do not question it anymore. To us it has become a mathematical postulate. A postulate is an undeniable fact, like the sun comes up during the day and the moon is visible at night.

If you read up on the IV (implied volatility) you will notice that the same is calculated on the basis of a few factors--the change in options premiums being a leading indicator. What an average Joe is willing to pay to trade an option is a subjective decision rather than an objective one. An average retail trader depends on at least some, if not largely, on guesswork. This is where half knowledge becomes dangerous.

If the option premium does not fluctuate much due to the lot sizes having been raised upwards, margins having been raised, big ticket traders holding their positions steady which stabilises the options premia, then all these can create a false sense of comfort that the VIX (volatility index) is subdued and fear levels are low.

I noticed low VIX readings throughout in recent weeks when the markets were selling off, across many counters and the headline indices as well. This numbed the retail investor-traders into holding their long positions assuming that there was little or no threat of a sell-off.

Now that we have identified the problem, is there a solution to it? Yes there is! Statistics comes to the rescue of a retail trader yet again.

Instead of using the IV (implied volatility) of options which is based on retail trader sentiments (which we know is unreliable) impacting options premia, switch to statistical ßeta (pure price volatility) of the underlying asset. This is where the old saying comes in handy – why buy bottled water at the river front when you can drink from the river itself.

What if a retail trader is not equipped to compute statistical ßeta on a scientific calculator and/or Microsoft excel worksheets? Use technical analysis charts and deploy an oscillator called ßeta to gauge the sheer volatility of any particular counter.

We traders are brain warriors. We fight and win trading wars with our ideas. Keep them sharp and you will stay ahead in the game.

Have a profitable day!