When uncertainty rises, retail traders reach for options.
When Trump’s Liberation Day tariffs struck global markets in April 2025, average daily notional F&O turnover climbed to ₹229 trillion, the highest since November 2024. Every fear event produces the same pattern: retail traders flood into options, most often choosing straddles and strangles.
A straddle involves buying a call and a put at the same strike price, profiting if the market moves sharply in either direction. A strangle is cheaper, placing the call above and the put below the current price, but it requires an even larger move to profit.
Both appear logical in uncertain times: direction-neutral and clean. In practice, they consistently disappoint.
The volatility illusion
The core misunderstanding lies in pricing.
assume volatile markets automatically make long straddles profitable. The reality is more unforgiving. Options do not become expensive after volatility arrives—they become expensive because volatility is expected.
Before any major event, premiums begin rising well in advance. By the time a retail trader buys a straddle, much of the anticipated move is already embedded in the premium.
India VIX spiked 53.9% on 7 April, 2025 — the session after Liberation Day (Business Today). Traders who bought straddles that morning were buying at peak fear, with implied volatility already pricing in extreme outcomes.
The same pattern repeated during Operation Sindoor in May 2025: India VIX surged 8% as tensions mounted, then collapsed 20% after the ceasefire. Straddle buyers paid elevated premiums for a move that, once resolved, deflated the very volatility they had purchased.
Break-even math
Consider a simple example.
trades at 24,000 and an at-the-money straddle costs ₹400. For the trade to generate profit, the index must move more than 400 points in either direction.
Suppose it moves 250 points—a significant swing by any measure. The straddle buyer still loses.
Volatility alone is not enough. It must exceed what the market has already priced in.
The IV crush
Even when markets move sharply, a second force can destroy the trade: implied volatility collapse, or IV crush.
Before major events, uncertainty inflates premiums. The moment the event passes, implied volatility falls quickly, dragging premiums lower.
Traders are left puzzled: the market moved as anticipated, yet the option still lost money.
This dynamic is especially visible during Indian earnings season. Stocks such as Reliance, HDFC Bank and Infosys see premiums surge before results and collapse immediately after. Zerodha’s backtesting of Budget Day confirms the pattern: long straddles produced losses across nearly every intraday entry window (In The Money by Zerodha, January 2026).
Sellers’ edge
There is a deeper structural factor at play.
Implied volatility tends to run persistently higher than the volatility that actually materializes—a gap known as the volatility risk premium. Investors systematically overpay for protection. Option sellers collect that overpayment as structural profit.
Studies of Indian options markets confirm that short-option strategies have historically generated positive returns by harvesting this premium. For buyers, this acts as a permanent headwind.
Retail scale
The scale of retail participation in Indian options markets is striking.
Retail investors’ share of derivative trading rose from 2% in 2018 to 41% by 2024. India now accounts for 84% of all equity options traded globally.
Strangles alone account for roughly 18% of option combination strategies on Indian exchanges, with daily volumes exceeding ₹8,500 crore on Nifty options.
Losses have scaled in proportion.
Sebi’s 2024 study found that 93% of over one crore individual F&O traders incurred losses between FY22 and FY24, averaging ₹2 lakh per trader, with aggregate losses exceeding ₹1.8 lakh crore. FY25 was no better: 91% of retail derivatives traders lost money, with combined losses of ₹1.06 lakh crore in a single year.
Many of these traders correctly read that markets were volatile and bought straddles for precisely that reason. The strategy made intuitive sense. The market took their money anyway.
The bottom line
Straddles and strangles are not broken strategies. They are misunderstood ones. They profit from volatility that exceeds what the market has already priced in, not from volatility itself.
The irony is structural: retail traders are most tempted to buy these strategies precisely when they are least likely to work — when fear is highest and premiums are richest.
Dr. Simarjeet Singh is assistant professor of Finance at University of Southampton Delhi and Dr. Hardeep Singh is assistant professor at IMT-Ghaziabad.