India’s Most Volatile Bank staged a remarkable recovery of 1,150 points in last 2 trading sessions. Despite a sharp fall of 1,220 points on Wednesday. In today’s session, the index was rigged with excruciating volatility, after flat around 47,838. Let’s execute a clinical analysis of recovery of 1,150 points in last two trading sessions and its impact on the Call options.
Understanding the Fall
Bank had plunged 1,220 points on Wednesday on the day of weekly expiry. The sharp fall triggered an expansion in volatility in the last two trading sessions. Since options are constructed beautifully by an interwoven mesh of volatility and time dilation, we must start with the profit booking in Call options last Friday. The idea is to flow with the actions of the market maker. When Bank Nifty opened on Wednesday, the covariance factors in the gamma and Vega in the Put options neutralized. Let’s not forget that the longs were squared up on Friday. Call it a coincidence or what you may, the institutional sellers created shorts at the same area where the Put neutralized (Kindly go through our recent newsletter). Thereafter, Bank Nifty plunged 1,220 points. Please note, that Put covariance neutralized in Bank Nifty when the market was soaring with confidence after election outcome, GDP and Inflation data. It cannot just be coincidence every time.
Yesterdays and today’s session was very interesting from the Options Greeks point of view. The market opened gap down 273 points gap down. The institutions covered their shorts. The striking part is, the Call covariance neutralized in the monthly contract, due to the massive short covering. There are two schools of thought at this juncture. Some would vouch to go short at rise, others would ask, ‘can we buy”? So here is the answer, “who are we to decide”? Play it to the books. Leave it to the covariance. In today’s case, you were better off selling a put option at the neutral zone. The 47,400 Put options sold @ INR 395, boiled down to INR 104, eventually covered at INR 150. 47,200 Put options sold @ INR 245 and covered at INR 158. But why did it take 4 hours for the Put to fall? You are right if you thought “short covering”. Let’s keep in mind that many longs have been squared off all over again. We have mentioned this in our recent newsletter as well, Institutional selling and long unwinding are two different things. Institutional selling leads to gradual movement towards the trend and unwinding leads to spike. Does this mean, the market will fall on Next week? Let’s leave that decision to the markets makers on coming days.
P.S -: No Institutional Seller has entered yet in markets. On 21st Dec 2023 (Thursday), we did see Institutional buying right at the gap down at the open (One of the reasons for us to sell puts).