Those who trade Bank Nifty options understand the importance of volatility and the massive opportunities it creates for option buyers and sellers both. However, today’s 616 points move in Bank Nifty between 46,256 and 45,641 was in stark contrast from other days. Thus in today’s article we shall discuss about this strikingly different behaviour in the banking index and also talk about how we can take advantage of the same.
Theta Vega Correlation
Volatility Adjusted Market Movement is a blessing if one knows how to talk to premiums. Premium calculations precisely guide you as to which point would be a desirable level for sellers to wrap up their positions and enter into opposite trades. Just one strike was used to track the whole trading day, that was 46,100 CE (Monthly).
Theta Vega Correlation is a point where one can trade against Theta or against Volatility. Positive correlation will make you money by eating up theta in OTM strikes and negative correlation will help you take trades in favour of volatility and catch explosive because seller wraps up his position and enters into long vol trades. 241(LTP) was theta neutral zone for 46,100 CE (Monthly contract), above which volatility would overpower the strike leading to exponential rise in calls
Now let us observe how the market makers made money from this scenario. To get the maximum of volatility, we traded in weekly options by tracking monthly premiums. Such trading style is often used by smart money where they buy what you sell and sell what you buy. Around 13:15 pm 46,100 CE (Monthly) crossed 241, at the same time 46,100 PE (Weekly) was trading around 260. It takes immense experience and courage to sell ITM options during the expiry day, but when you have your numbers and 3D Delta in place, you go for a kill.
46,000 PE and 46,100 PE (both weekly contracts) were sold at 65 and 86 and later covered at 15 and 30 respectively. There is a common belief that selling options, involves huge capital and retail traders cannot take advantage of option selling. Truth be told, selling Bank Nifty options can be sold and covered intraday like the real time example stated above. What is a more important, selling Bank Nifty option requires approximately Rs.30, 000 per lot if the position is covered the same day.