Over the last one-week Bank nifty has traded in a tight range of 1,000 points 42,715(High) and 41,279(Low). The surprise movements have triggered excessive intraday volatility and has been the primary cause behind the rise in option premiums. The important question is how can we trade options during such excessive volatility?
Take for example, today, Bank nifty fell almost 522 points from the high and then bounced back more than 447 points from the low. This is a typical high volatility scenario which lacked clear direction. So what is the possible solution?
Volatility Adjusted Market Movement
What exactly is Volatility Adjusted Market Movement? Volatility Adjusted Market Movement is a tool that measures intraday range of a given instrument and lets you trade that range by giving you an appropriate strike to trade and understand the volatility on those strikes.
For ease of understanding imagine an elastic band. The band can be stretched and pulled by an external force. However, we all know that the band will ultimately regain its original shape once the magnitude of the external force drops below the force of its elasticity.
In our case, the Volatility Adjusted Market Movement gauge compares the market volatility with the IV of the option strike and identifies the option strikes to be traded.
41,600 Put strike in the 19th January 2023 weekly contract was sold and the 42,900 Call strike in the 19th January 2023 weekly contract was Sold.
The process is very simple, first, the option strikes are identified by the Volatility Adjusted Market Movement grid to find out whether the premium was above or below normal. A short position was opened in the 41,600 Put @86 and the Short position was built in the 42,900 Call @ 72. The value of the spread stood at INR 158 credit. The position was finally covered at INR 70 credit at the end of the day. There are two bright spots about using Volatility Adjusted Market Movement are that it lets you initiate a trade at an extreme reversal point and gives you a confirmation whether a seller is active on that strike or not. At that time India VIX is at 14.5 What is even more interesting is, by the day end, it gives you a final confirmation that trade is supposed to be carry forward or square off intraday by fixing your SL through appropriate hedges.
Disclaimer – We initiate complete hedge positions in the live market and above trade is used to explain the concept.