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Put Sellers Made the Most of it!

India’s banking benchmark Bank Nifty staged a remarkable recovery of 950 points in last two trading session, despite a sharp fall of 2,546 points in last eight trading session. In today’s session, the index was rigged with excruciating volatility, after opening flat around 47,749. Let’s execute a clinical analysis of recovery of 950 points and its impact on the Call and Put options.

Why did it fall?

Bank Nifty had plunged 2,546 points in last eight trading sessions. The sharp fall triggered an expansion in volatility in the last two trading sessions of fall. Since options are constructed beautifully by an interwoven mesh of volatility and time dilation, we must start with the profit booking in Call options last Friday(10/05/2024). The idea is to flow with the actions of the market maker. When Bank Nifty opened on Monday, the covariance factors in the gamma and Vega in the Put options neutralised. Let’s not forget that the shorts were squared up on Friday. Call it a coincidence or what you may, the institutional sellers covered at the same area where the Put neutralised. Thereafter, Bank Nifty plunged 357 points, but the positions were left open, overnight along with ultra strong hedges. Please note, that Put covariance neutralised in Bank Nifty when the market was soaring with confidence about the outcome of the BJP coming back to power post Phase 4. It cannot just be coincidence every time.

Bounce Back

Monday’s session (13/05/2024) was very interesting from the Options Greeks point of view. The market opened flat. The institutions covered their shorts. The striking part is, the Call covariance neutralized in the monthly contract, due to the massive short covering. There are two schools of thought at this juncture. Some would vouch to go short at rise, others would ask, ‘can we buy”? So here is the answer, “who are we to decide”? Play it to the books. Leave it to the covariance. In today’s case, you were better off selling a put option at the neutral zone. The 47,600 Put option sold @ INR 203. It was eventually covered at INR 75. But why did it take two trading sessions for the Put to fall? You are right if you thought “short covering”. Let’s keep in mind that Monday’s longs have been squared off all over again. Does this mean, the market will fall in coming time? Let’s leave that decision to the markets makers on.




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