Why Bank Nifty Fell 2,800 Points, Was it a Pre-Planned Selling?
India’s Most Volatile Index, Bank Nifty futures tanked 1,378 points on Friday (27th Jan 2023). The index had zoomed up 1,188 points in the past two trading weeks and registered a high of 43,249 (Future level) on Tuesday (24th Jan 2023). In Thursday’s session, the institutional traders-initiated their selling. Let’s find out what the institutional traders had to say.
3D Delta profile indicated a very alarming closing in February expiry contracts on Tuesday after making a high of 43,249. An open below 42,675 and sustaining there would’ve attracted sellers which is where they entered aggressively. We need to keep in mind here that they did not initiate outright shorts on Friday. The 2,828 points fall had a mathematical element of surprise as the move was pre planned by market makers. Retail clients also can replicate these moves if they can determine the point where the theta overshoots its neutral threshold and understand how the auction is developing in the live market.
We all know that the January Futures contract will merge with the underlying on Wednesday (being the monthly expiry). This move will trigger a stunning acceleration in theta decay. Therefore, the idea is to take advantage of this thumb rule with the help of specific option strike analysis and 3D Delta software. We had indicated the same in our last week’s post.
The Call and Put Analysis
To find out more about the institutional positions, we traded in Bank Nifty to take advantage of its volatility. We scalped by selling call options around the same area where aggressive selling started on Friday. The idea was to capture whether the magnitude of time decay in the Call option was higher than the magnitude of expansion in the Put option. Let us keep in mind that we stacked the odds in favor
of the Put option. What we observed that from the point where bank nifty started falling on Friday, Put options had expanded 3 times but Call options didn’t even fell by 50%. When bank nifty was 40,700, 2000 points OTM Call option of strike 42,700 was standing at 95. This is pure theta which was just standing there idle. 42,700 Call option was the safest strike to sell as it was our Friday Volatility calculated strike. The position was later covered at 64 and further at 57.