Traders Cut Exposure Sharply After April 7 Selloff Amid Surging Volatility

Steep Index Drop and Volatility Surge Catch Traders Off Guard

Indian equity markets witnessed one of their most turbulent trading sessions on April 7, with a sharp decline in the mainboard indices that left traders scrambling to reassess their positions. The week began with markets opening with a near five percent gap-down, followed by a modest recovery that still saw indices end nearly three percent lower by the day’s close. This dramatic swing was compounded by a near 65 percent single-day spike in the India VIX, the country’s primary volatility index, creating a deep sense of unease among traders and prompting a widespread scale-back in exposure.

Market participants, who had been expecting weakness driven by global trade tensions and geopolitical uncertainties, were nonetheless surprised by the magnitude of the fall. The intense pressure in the morning session, combined with an unexpected last-hour recovery, added to the confusion. The situation has led many traders to cut their capital deployment significantly in upcoming sessions until a clearer macroeconomic picture emerges.

• Indian indices opened nearly 5% lower and closed around 3% down on April 7.

• India VIX surged nearly 65% in a single session, signaling heightened market anxiety.

• Traders were unprepared for the scale of the drop and the abrupt recovery.

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Quarterly Payout Strategy Backfires for Option Buyers

The market downturn on April 7 was particularly painful for traders who had opted to hold out-of-the-money (OTM) options as a strategy to bypass the quarterly payout requirement. According to Securities and Exchange Board of India (SEBI) regulations, brokers are required to transfer idle client funds back to their respective bank accounts at the end of each quarter. The latest cycle fell on April 4, and to avoid operational delays or complications, many active traders chose to park their funds by buying low-cost OTM options.

This commonly used workaround, however, turned disastrous in this highly volatile environment. The sharp decline in the indices left these options virtually worthless, resulting in significant capital erosion. Traders had assumed minimal downside risk due to the inexpensive nature of the options, but the sudden collapse in market sentiment upended those calculations.

• SEBI’s quarterly payout rule forced many traders to avoid holding large cash balances.

• To remain active, traders bought OTM options on April 4.

• The steep decline on April 7 made many of these positions worthless, leading to heavy losses.

Heavy Individual Losses Shake Market Confidence

For several traders, the April 7 session was not just another volatile day but a deeply damaging event. One senior trader, speaking on condition of anonymity, revealed that a fellow market participant incurred a loss of nearly ₹50 lakh due to an ill-timed bet on OTM options. The speed and intensity of the market’s move left little time for mitigation, and the resulting losses have prompted a significant re-evaluation of risk appetite among seasoned professionals.

Veteran trader Jitendra Jain admitted that he refrained from trading altogether that day, having anticipated volatility following Friday’s weak close. “Many traders thought they could dodge the payout rule with cheap options,” he said, “but the volatility just overwhelmed those positions.” Rajesh Sriwastava, another well-known figure in the trading community, echoed similar sentiments, noting that the magnitude of the intraday move was outside most traders’ expectations.

• Losses have crossed into several lakh rupees for individual traders.

• Many participants are now reconsidering strategies involving OTM options near payout cycles.

• Veteran traders admit to being caught off guard despite anticipating a correction.

Exposure Cut Sharply Amid Global Trade Uncertainty

In response to the heightened volatility and unexpected losses, traders across the board are significantly scaling down their positions. Jain, who typically deploys full capital in stable market conditions, now plans to allocate only 25 percent of his funds in upcoming sessions. Sriwastava is taking an even more cautious stance, stating that he will operate with just 10 percent of his total capital.

A major reason for this defensive posture is the ongoing uncertainty surrounding global tariffs and the lack of clear signals from the United States on trade policies. With fears of retaliatory measures and escalating economic standoffs dominating headlines, traders are unwilling to expose themselves to the full brunt of market unpredictability.

Even the late recovery seen during the final hour of trading on April 7 did little to restore confidence. Sriwastava commented that the bounce could not be tied to any concrete developments and believes that such movements are driven more by short-term positioning than fundamental recovery.

• Traders are reducing exposure by up to 90% to manage risk.

• Uncertainty over US tariffs and global countermeasures is fueling a risk-off sentiment.

• Last-hour recovery failed to inspire confidence due to lack of clear catalysts.

Cautious Optimism Hinges on US Policy Clarity

Some traders believe that a temporary pause in US tariff implementation could offer a window of relief to the markets, potentially sparking a short-lived rally. The idea of a 90-day moratorium on additional trade levies has been discussed in policy circles, and if announced, could ease global investor anxiety. However, market participants remain skeptical about the durability of such rallies unless a broader resolution to trade tensions is reached.

Sriwastava, despite monitoring the situation closely, does not plan to increase his exposure even in the event of a relief rally. “We need structural clarity, not temporary fixes,” he said, adding that markets may continue to whipsaw in either direction until a consistent policy message emerges from Washington.

• A potential 90-day tariff pause could trigger short-term gains.

• Traders remain skeptical of any rally not backed by policy resolution.

• Most market participants are waiting for stronger signals before re-entering aggressively.