Why will it be difficult to achieve above average returns for sellers going forward?
This period saw the VIX hovering around levels of 10-13, similar to the current scenario. Back then, option selling was not popular, and there was very little participation, this might be one of the reasons for low movements in the Index.
It was quite easy to make money by selling far OTM options, as we didn't experience premium spikes like the ones we are currently witnessing.
Additionally, there was very high leverage, which meant that even selling far OTM options would yield good rewards and higher probabilities.
After the COVID crash, the VIX ranged from 15 to 25. During this period, premiums were high. Even though the markets were volatile, we could stay far OTM, as they offered very lucrative premiums.
To provide context, in March 2022, on an expiry day morning, options 1500 points away were trading around Rs. 10-15, with the VIX around 25 and today 400pt away Option trades at Rs. 10-15
2023: (The Issues)
The VIX is around 10-13, similar to 2017-20, but we don't have leverage to sell far OTM and make sense of it. There are also a lot of premium spikes, unlike the older regime.
Today means that when we go 500 points away and sell a Rs. 7 Call or put, we can only make half of what we were able to previously by going 1500 points away.
This implies that we face high risk due to spikes, have less than half the premiums to collect, and lack the leverage to go far OTM. This will make selling difficult, and the average returns that sellers used to enjoy previously will decrease.