Markets on red alert across the globe

MUMBAI: Volatility has often been seen as a via media to generate better returns by traders. But the gyrations in the past few sessions have left even the more seasoned players in this game, slightly uncomfortable.

The uneasiness has resulted in the smarter traders changing their trading strategies as well as returns expectations for the time being to adjust to the ongoing volatility.

Brokers and technical analysts said several short-term traders, who have been unable to catch the sharp movement in the market in the past few days, have lost money. The smarter ones have played it safe. Instead of sticking to the stop-loss strategy, which is usually employed in a less volatile market, they have chosen to hedge their risks, despite the prospect of lower returns.

“Expert traders are hedging effectively, like they buy futures and buy put options at the same time. At the moment, this is a much better strategy than using stop-losses,” said Almondz Global Securities’ technical analyst and derivatives strategist Gurudatta Dhanokar.

Analysts said many smart investors have reduced the period between which they buy and sell a stock in view of the current volatility. For instance, in a more stable market, a trader buys a stock with an intention of holding it for 3-4 sessions and expects a return of 5-6%. Now, he would hold the stock for just a day or two and lower his expectations of returns.

The current volatility, with a negative bias, in domestic equities has been in line with the trend overseas. In the past many sessions, shares have changed directions intra-day in matter of minutes, as investors have been quick to utilise upsides to sell and downsides to cover their short positions.

“The spike in intra-day realised volatility has been sharper than usual. With intra-day volatility doubling from the preceding rally, this spike matches the one that the markets underwent in May 2006 (when realised volatility tripled from the preceding period of rise),” investment bank Morgan Stanley said in its latest strategy note.

Experts expect the current volatility in domestic equities to continue till the global market stabilises, which seems to be the big question mark at the moment. A section of the market believes that the downside could be limited from current levels, given the large creation of short positions in the futures segment. They believe a sharp fall could trigger covering of these shorts and pushing up the market.