In the recent report by SEBI where 93% of F&O traders makes loss and the rest smallest portion of 7% consisting of FIIs and Prop Traders makes profit. We are proud of our team members and traders that work alongside us to make us stand in that 7%. Our collegaues from different funds and the brokers community will agree to it. These people have seen us grown from 2017. Now, most important question is, what is the secret sauce? Well, for that, get in touch with us.
As I said yesterday in my post, In F&O segment, you are competing with the best brains in the world & they will not make it easy for you. Read this article and others on our website to understand how we do it...
Of all the different methods that are used to evaluate the fair value of an option premium, neutralizing the volatility premium provides the strongest edge. The obvious question is why? First, volatility does not follow any historical reference point. The second and the most important reason is, when you neutralize the volatility, it is a real-time activity involving live data inputs. Hence it provides pinpoint accuracy in picking up strikes at the time of execution. In today’s article, we shall discuss what terminal volatility is & how it can be
used.
What is Terminal Volatility?
In essence, terminal volatility is a tool that measures the speed of the market. We know that prices are driven by emotions in the trader's mind. These emotions are often classified as demand & supply in conventional economics. However terminal volatility looks at these shifts as extreme confidence or extreme uncertainty. It works to identify the point where an option buyer has no point of return.
The Trigger
We all know that there was news of a Fed rate cut in the market. The RBI should also now cut the rates. This is positive news, and it added fuel to the call option buyer. This caused Call premiums to overheat. Friday (20/09), when Nifty registered a high of 25,849 the terminal volatility gauge spotted an exponential expansion in the 25,850-call option in the 26th September contract. The call strike had already overheated and registered a high of 133. The terminal volatility gauge indicated that the buyers had reached extreme confidence.
The Execution
1 lot of the 25,850 call was bought on the 26th of Sept contract @53 on 20/09 (Friday). But we had to neutralize the risk that could be triggered by a sudden rise in volatility overnight. So, we sold 1 lot of 26,000 Call on the same expiry contract @34 (average). It was a debit spread as we had paid INR 19 to create the spread ({25x (55)-25x (36)}/25) = +19. The max risk in this spread was computed at INR 475 (25*19) per lot. This risk factor depends on the extent of overpricing in the 25,850-strike call. When the market opened today (24th Sept - Tuesday), spread value was at a whopping INR 80 per lot. The most important point here is, we did not know whether Nifty would be relatively volatile or relatively quiet today as it was the 2nd last day of the September 2024 contract. We simply neutralized the volatility and was prepared to take a maximum risk of INR 475 per lot. The RR as you know was a nerve-wracking 1:4, and the best part, you paid minor premiums to create this spread. Interesting, isn’t it?
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