As discussed in our recent newsletter, all major events like, Indian Budget, Federal Reserve Monetary Policy, RBI Monetary Policy and one surprise event, Adani Mishap have come to an end. None of these events triggered a massive volatility to our indexes (Nifty & Bank Nifty). As seen in the sharp drop in India VIX, which led to evaporation of extra premium in the market. People trying to chase breakouts and breakdowns as after effects of the above mentioned events was capitalized by Option Sellers. Let’s find out how..
Institutional Traders Have Created Option Ratio
3D delta system and Black Scholes calculations are indicated that Nifty and Bank Nifty are trading in a small corridor because institutional traders have intelligently built Ratios in both Call and Put options. What is most important is they were expecting big moves and spike in volatility due to upcoming multiple events. The time of occurrence is not important as institutional players have balanced their ratio spreads between Theta and Vega covariance factors.
What was the Market Expecting?
Option Premium calculations were indicating a heavy swing before the budget; however, institutional traders are gearing up for all possibilities. Nifty and Bank Nifty failed to crack open a clear direction because of the open positions in options ratio, both in Calls and Puts.
How Can Traders Take Advantage?
Option trading during budgets or other big events can be crafted intelligently with a 60-40 balance between options Theta and Vega covariance factor. This ratio is generally followed by fund houses as it keeps the door open for big profits in the event of a spike in Volatility, due to the outcome of the event. Fund Houses are placing their trades on the probability of a good budget and sane & sound decision by the central banks. The 60-40, Theta - Vega covariance ratio makes the situation conducive to make money from market irrespective of the direction.
Live Example
Volatility Adjusted Market Movement indicated a tight rangebound market right from 3rd February, 2023. Theta neutral zones were identified and based on the covariance, 42,000 CE and 41,300 PE were sold collectively at INR 282 for 9th February Expiry, 2023 on 7th February. The sold premiums expired 0. The range remained the same for 16th February, 2023 expiry as well but Volatility calculations asked us to create range trade by adding a ratio on put side with 41,300 PE and 41,100 PE and 42,000 CE. These strikes were sold and the entire position was hedged by buying the far OTM options in the same ratio to limit the downside. The spread was initiated at a credit of INR 293 and was later covered today at credit of INR 54.
These scenarios were mentioned in our last two newsletters. The calculation was explained to our traders in our first batch. To be a part of our community, Join our curated courses. There are always new calculations that we are working on daily basis so that retail traders understand how smart money (algos) trading are.
