India's benchmark Nifty witnessed a roller coaster ride yesterday (13/01) as the index opened gap down and dropped down to 23,047 in the afternoon. Initially, Nifty scaled up slowly and registered a high of 23,340 around 10.35 AM. The most important question is why did Nifty fall sharply post 10:35 AM on 13th January 2025?
Was Today’s Selling News Based?
In yesterday’s session, the 3D delta system captured institutional sellers entering the market. Whether there is negative news or not, option buyers can only make money if the institutional traders participate. During the first few days of the January 2025 contract, there was positive news in the market about relief in budget, increase in PMI and interest rate cuts, and the market began climbing. So why didn’t the call option generate exponential returns despite positive news? Simply because the market makers did not participate in the up move. What you thought was a long build up was a mere short covering. Blue circles on 9th & 10th Jan profiles are the sellers who quietly build their short positions.
What Triggered The Sharp Fall?
To understand what triggered the sharp fall towards the end, we must first look into the bull call spread closely. On 10th January 2025 (Friday) session, we replicated the ratio position of the institutional traders and sold 3 lots of 23,500 call options for every 1 lot long position in 23,300 call options. The institutions had entered the ratio at INR 218 credit (FYI the ratio is trading 8 credit). Tracking the call spread we went long at INR 43 in a Bear Put Spread by buying 23,350 PE and selling 23,150 PE in equal ratio on 10th Jan 25 and carried forward for Monday (13/01). The spread was sqaured off on 13th Jan at INR 100 a set as we witnessed a massive gap down. The ratio clocked a maximum return of 113% in 2 trading sessions. An interesting twist happened when Nifty arrived at 23,150. Since 23,304 were the high of yesterday’s isolated selling, the institutional traders chose to square off the ratio exactly at that point and the market witnessed a sharp fall of almost 300 points.
Comments