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We Got Out…
In a surprising turn of events, India’s benchmark Nifty was riddled with excessive volatility in today’s session despite India Vix remaining below 15. To the naked eye, today’s move might appear as another day of a choppy trading session, however, as per the options Greeks calculation, today was a perfect trading opportunity for the scalper. The important question is why? There were two important aspects that we must take note of. Firstly, today was the last day of the Nifty weekly contract. Thus, the acceleration in theta decay allowed enough room for the scalper to sell overvalued options with respect to the time and the price of Nifty futures. The second and most important factor was the covariance factors between the option gamma of specific strikes and their theta components.
What Is Scalping
Scalping is an intraday trading technique that is built to achieve results by quickly swinging in an out of trades. In scalping, the cumulative returns of all the trades take advantage of the erratic moves in the market.
The Undervalued Call Options
To understand, today’s volatile move, we need to look at the valuation of the 52,700 Call option on the 2nd of December. In this session, Bank Nifty had made a low of 51,694 at 9:15 am (opening tick), at the same time, the 53,000 call strike registered a low of INR 397. Around 12:00 pm in the afternoon on 29th Nov, the index registered a low of 51,759. This is where mispricing was triggered in 53,000 call options. The Index recorded a new low on 2nd December while Bank Nifty puts failed to register a fresh high. We need to keep in mind that 2nd Dec’s mispricing led to an undervaluation of the 53,000 Call strike. Since undervaluation in options often leads to big swings to bridge the time value gap, we bought the 53,000 Call option @ INR 509 and carried overnight with a spread. We booked out calls when it reached our target of INR 920. The same call made a high INR 1,612 today (5th December 2024).
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