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What Is Price Rejection? How Can It Be Used to Trade In Options?

Price rejection has its relevance in Technical Analysis, but we never trade based on TA. So, what do I mean by Price Rejection here? Well, since we use 3D Delta Software, this indicator was discovered by Peter Steidlmayer based on the concept of AMT (Auction Market theory). Basically, this indicator shows whether the presence of any institutional buyers or sellers are in the system and how strong they are. Institutional buyers and sellers’ trades prices which are normally not traded by retailers because of factors such as Volume, capital, algos and what not. If an institutional seller is in the market, what traits does he show according to the software?

1) Gap down

2) Significant shift in the market ranges from a day prior

3) Weak closing, probably near day’s low.

These factors are a ready recipe for another gap down. But what if it doesn’t gap down? What if it opens near the previous day’s high? That is a classic case of rejection. This rejection was done by responsive buyers which causes sellers to wrap up their position and the market goes for a short covering. That is exactly what happened on 10th October 2023 (Tuesday). Attached is a screenshot for your reference.

The circled area is seller tail with gap down and range shifting downward and price closing near day’s low. The very next day, the price opened near day’s high by rejecting the price that was settled by the institutional seller a day prior at the closing. Post that, a short covering took place above prior day’s high.

On the premium front, as mentioned in previous newsletter too, 44,100 PE (11th Oct Expiry) was taken over by put sellers as the correlation between Vega-Theta on that strike turned positive. This in turn indicated a possible rally of Bank Nifty above 44,100 for 1 ADM (one ADM is 300 Points). So, when you have a go go on both 3D Delta and Premium, you go all out. We created a little trending spread called Bull Call Ratio Spread by buying 1 lot of 44,100 CE, selling 2 sets of 44,700 CE. To offset the debit of this spread, we created another spread on put side by selling 1 lot of 44,100 PE and buying 1 lot of 43,500 PE, all weekly expiry of 11th October 2023 Expiry. This spread was created at a debit of INR 85 per set. Next day at open, i.e., 11th October, right, we squared off the trade at a whopping INR 384 a spread giving us a profit of INR 299 per set. When opportunities like these presents, one should go for a conviction trade based on your risk appetite. Hedging is something that will save your alpha in volatile times like one going on in the market.

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