In case the market goes against it, the decay in premiums helped cover the MTMs. So much so that trading on expiry became a thing and some of the algo management firms got to managing 100cr+ trading portfolios within a short period of time.
As lockdown hit people suddenly found a lot of time on their hands to experiment with various hobbies, one of them being active trading. Co-incidentally, we saw markets bounce back and these so-called lockdown traders made a lot of money.
This time, however, unlike previous bull markets these newbies were different in one aspect – their approach to markets & trading.
Earlier bull markets saw some specific sectors or group stocks going up to euphoric levels, like IT in FY2000 and Real Estate in FY2007, only to fall 60-70% or in some cases even 90%+ once the tides turned.
However, this bull market post-lockdown was a broad-based rally with participation going up especially in index derivatives.
These new traders came with a clear trading mindset and understanding that trading comes with risk.
They wanted to create parallel income streams from trading options. A lot of them, using tools, devised various strategies and backtested them before implementing them in the market.
Further, they automated these strategies using algo platforms so that they could go about their jobs/professions while their money worked for them. Now most of these strategies were built around the concept of Theta decay. This means aiming to profit from the decay in premiums of options as time passes or as they near their expiry date.
So, if there is no sudden large movement and one sells OTM call/puts, one is destined to benefit from the options losing their value. We saw India VIX (the barometer of volatility) go up to levels never seen before.
