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Have Sellers entered or was it Profit Booking?

India’s most volatile index, Bank Nifty spot tanked 740 points today. The index was in a strict range of 800 points since 20th July 2023. In today’s session, the institutional traders initiated created a short positions in the range of 46,500 to 46,300 levels on futures (Indicated by 3D Delta). Market participants were divided into two schools of thought today. Some saw the 740 points fall as selling, while others labelled it as profit taking. Let’s find out what the institutional traders had to say.

Selling or Profit Booking?

Bank Nifty Futures opened at 46,201 in the morning and clocked an All Time High of 46,500. The institutional traders started wrapping up long positions around 46,500 to 46,300 levels .As indicated in our last newsletter which was published on 24th July 2023, we told about 46,100 CE going below 122 was a signal that sellers had dominated that. Now for that call to realise its entire theta, it had to move to 45,800 as per the calculations. So keeping in mind the 46,100 CE, we tracked 45,800 CE which was at 320 when 46,100 CE went below 122 and Bank Nifty futures were at 46,157. Retail clients also can replicate these moves if they can determine the point where the theta overshoots its neutral threshold. We all know that the July Futures contract will merge with the underlying today. This move will trigger a stunning acceleration in theta decay. Therefore the idea is to take advantage of this thumb rule with the help of specific option strike analysis.

The Call and Put Analysis

To find out more about the institutional positions, we sold the 45,800 Call options around the same area i.e. 310 (LTP), 200 points below the level where profit booking was initiated by the market makers. The idea was to capture whether the magnitude of time decay in the Call option was higher than the magnitude of expansion in the Put option. Let us keep in mind that we stacked the odds in favour of the Call option. The Call was sold at INR 310 first and then the same was hedged. Bank Nifty fell 600 points post that trade, and the Call option was bought back at INR 5 which was a whopping 98% gain on premium sold. The same strike expired worthless (i.e. 0) We can conclude the from the above position, that it will be fair to classify today’s fall as selling and not profit booking.

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