India’s most volatile benchmark Bank Nifty witnessed a sudden spike in volatility during the last 3 trading sessions (12/09 Thursday to 16/09 Monday). The index has rallied almost 1,200 points to register a high of 52,208 today on spot basis. So what triggered the upswing , and why was Bank Nifty hit with sharp volatility ? Let’s discuss.
The Buy Swing & The Volatility
On 12th Sept (Thursday) session, Bank Nifty displayed ample confidence during the trading day. The index scaled up 850 (approx) points and witnessed a sharp rise in volatility during the 2nd half. The up-move in the 1st half was powered by the neutral covariance factors between the Call gamma and Vega in the weekly options contract. The weekly neutral zones are highly conducive for intraday trading as it creates opportunities with ultra-low risk and exponential returns for options traders. The 2nd half was rigged with volatility due to booking in the intraday positions in call options by butchered call sellers. It is very important to note that today all positions in long Call options have been squared off as Wednesday we have FOMC.
Trading Without Predictions
Trading without prediction is an act of flowing with the market. It is about strictly moving along with market maker between 9:15 and 3:30 pm. There are 3 strong advantages to this approach. First, the market makers build their position in congruence with the option greeks. Second is the sheer size of the institutional positions. The third is their ability to execute trades with zero emotions. This is what gives them high accuracy and the edge to generate attractive returns.
Over the period of last 3 trading sessions for instance, the 51,700 CE weekly call option was bought @ INR 250 and hedged this with 52,200 CE @ INR 82 in the ratio of 1:1 when the Gamma and Vega covariance factors neutralized. The effective cost of this spread was INR 165 per lot, which means The maximum risk we bear is 165 points The call was bought around 2.10 PM on 12/09. Thereafter, Bank Nifty climbed almost 600 from Thursday to Monday (Today) and registered a high of 52,208 (spot). The 51,700 call went on to make a high of INR 590 and we squared off the spread at INR 490 and spread was booked at INR 311. A whopping 2X return on the spread with defined risk. That’s How It’s Done! PREMIUMS NEVER LIE..
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