India’s most volatile Index Bank Nifty witnessed an astonishing rally of 4200 points in last 20 trading session; this move has surprised the sellers and closed with confidence around 43,685 (Spot). Today’s upswing is yet again a strong reminder that it pays to remain with the trend at all times. Derivatives trading become smooth if we understand the 2 cardinal rules.
1. Understand how Greeks are positioned.
2. If you are a buyer, think like the seller and vice versa.
Where is the Profit Booking?
Smart money was very well positioned right from 28th April with their positions. They had initiated a spread in the market in the ratio of 1:3 that means for every 1 call sell they sold 3 puts. Indexes have rallied more than 1,350 pts in Nifty and 4,200 pts in Bank Nifty and institutional money is smartly booking their positions without creating any havoc in the market. One who would wait for a reversal in anticipation that now market will fall would never get a trade. Smart money intelligently created ratios in such a way that even if market goes up; they end up making money on call side too. We followed the same.
In last 4 trading session, bank nifty gave a movement of 581. Interestingly, the above movement neutralized the covariance factors in the Call options. At this juncture, the institutional traders sold a specific Call strike in the weekly contract. Keeping in mind the neutral covariance in the Call and the position of the market maker, we sold the same call strike.
Go for the Kill!
We had discussed in the past that institutional traders build positions based on solid mathematical systems. This means that the market is likely to witness sharp swings if the institutional positions are challenged. Take for this week’s move. The market makers sold Put options in the first half. The position was wrapped up today with handsome profits. Earlier (2nd/3rd May), they waited for the 43,300 Call Gamma and Vega in the weekly contract to neutralize. When Call strike arrived at the binomial price, they executed a trade again.
The 3 hallmarks of this trade were
1) Zero emotion,
2) Super professional approach and
3) Stringent discipline.
We followed the market maker and sold the same Call @ INR 259.Bank Nifty moved down to a low of 43,078. The Call strike registered a low of INR 88, our target was 93. Below 93, the call had entered into dangerously undervalued zone. Hence, the call was later squared off at INR 104. The Call trade fetched INR 155 per lot. Overall; the market makers had another fruitful day, by sticking to their trade discipline and the same call of 43,300 made a high of 409 and closed at 384.