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Bank Nifty - Abhi Hum Zinda Hai!

Writer's picture: amplifytradingamplifytrading

If you are a Bank Nifty options trader, you are certainly aware of what volatility is. However, the moment someone asks you to apply the same concept and trade Bank Nifty options, you are lost. In today’s article, we shall look deeper into this seemingly complex topic and come up with an easy solution. We shall also provide a live trade to make life easy.We all know that Bank Nifty undergoes huge volatility shifts on a daily basis. So what does this actually mean? Theoretically, volatility can be defined as the standard deviation of the return provided by stock in one year. This is where things get interesting; you must understand that volatility in options is not the same as volatility in the equity market. The important question is why? The answer is simple; stocks do not undergo theta decay with the passage of time when markets witness low volatility. This is exactly why option trading requires a keen sense of understanding of how the Greeks are correlated. In this case, the relationship between volatility adjustments and theta decay. This concept is immensely powerful and works like magic for instruments like Bank Nifty options. For ease of understanding, we shall break it down to 2 steps. First, we shall look into the theta decay progression and then correlate it with volatility.



Step 1


Observe Bank Nifty’s behavior from a neutral standpoint on the January 2025 expiry onwards. If you look closely, you will notice, Bank Nifty had undergone incredible swings. The index had plunged 4,082 points in seven trading sessions. Given such volatility, it is quite obvious that put option buyers would have bought OTM strikes in Bank Nifty. If this is true, then there would be specific put strikes that are heavily overbought. At this time it is important to calculate the volatility adjusted theta drift and identify the put strikes that are over-valued.


Step 2


Think like an option seller. Take for example you want to sell a put option when Bank Nifty had fallen more than 4,000 points and hold it overnight. You certainly would need to ensure that the option you are selling is heavily overbought. Why is identifying an overbought option so important? This step will ensure that the market maker will dare not build long positions in that strike at all. Thus, stay focused on the fair value of the option and find out the volatility adjusted market movement. When Bank Nifty plunged 4,082 points from 3rd January to 10th January, we used volatility adjustments together with the theta progression and found out that the 50,000 call was heavily oversold. Keep in mind that we are simply correlating the options theta progression with respect to the shift in the vega component. Thus the 50,000 Call was sold at 294 and sold 50,300 calls at 231 and bought 49,500 calls at 441 with deep far OTM calls to hedge it on the 13th of January 2025. Spread was initiated at credit of 320.  If you look closely, you will notice that Bank Nifty rallied more than 1,700 points post 13th January but we still held the trades because we were stress free and very confident about seller’s mindset. The question is why? Well, you should have guessed it by now; the market makers simply ate up the put premiums and were active selling calls. The strikes from and above 50,000 Call option melted away like ice-cream under the hot sun. We closed our position at credit of 93, netting a total profit of Rs. 227 per set on 22nd January 2025.



Finally, Our February 2025 Batch is going live from 19th February 2025. For the first time, we will be giving our 2 weeks free access to our students who are selected for this batch (February 2025).


DO NOT MISS THIS OPPORTUNITY as this will be entirely new approach and beneficial. Whoever wants to join this batch, kindly fill up the form and we shall get back to you ASAP.


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