India’s benchmark Bank Nifty futures triggered a sharp upswing of 960 points today from the lows. Today’s up-move was a magnificent example of option mispricing. Although news headlines in the morning screamed “Bad budget and harmful for the economy and common man”, we shall talk about how the institutional traders managed their positions based on mispricing of options on the background. Main move in the markets came post 12:30 PM. Then how did we create positions from 11AM?
The Vega expansion
Today’s rally was an intelligent move by the market maker. To understand this, we must look into what they did in the futures market. If you see the picture below, you will see white circle marked at the bottom – Those are institutional buyers. The institutional traders had realized that there is extra premium in put spreads and to neutralize the uneven Vega expansion in the options market they went big on selling puts. The question is what caused this uneven expansion in the options Vega?
The Sitharaman Impact
If you watch closely, Bank Nifty was falling with ease in the last few days due to Finance Minister Nirmala Sitharaman’s tax sops. We have seen this before; Bank Nifty has zoomed up and down in a single day during budgets. The explosive nature of that move causes the implied volatility in certain strikes in the options contract to rise. Same thing happened between 23rd July to 26th July (today). The institutional traders took advantage of the uneven expansion in options implied volatility.
The Multiple Triggers
Today morning, there were at least 4 triggers to go long..
· Presence of Institutional buyers
· Bank Nifty made new low since yesterday but deep ITM puts did not make new high
· Weekly put options were filled with unnecessary premium which lead to covering calls
· SL triggered for straddle traders.
Keeping all these things in our parameters, we created a short position in 51,000 PE @444 at 11.08 AM of 31st July contract. Bank Nifty rallied another 600 points from there and 51,000 PE was covered @252 which later made a low of 199. Important question here is - Can a retail client do this? OBVIOUSLY, JOIN AMPLIFY!
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