India’s most volatile Index Bank Nifty staged a remarkable recovery of 1,124 points today, despite a sharp fall of 905 points on Wednesday. In today’s session, the index was rigged with excruciating volatility and a strong rejection on seller’s price, after opening 97 points gap up around 46,218. Let’s execute a clinical analysis of today’s recovery of 1,124 points and its impact on the Call options.
Understanding The Fall
Bank Nifty had plunged 905 points on Wednesday. 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 on Thursday (29/03/24) expiry day). The idea is to flow with the actions of the market maker. Put options were heavily injected with overvalued premiums and the ratio of option pricing was standing at 1:3.7 which is normally 1:2.
When Bank Nifty opened on Wednesday, the covariance factors in the Gamma and Vega in the Put options neutralized. Call it a coincidence or what you may, the institutional sellers created shorts at the same area where the Put neutralized. Thereafter, Bank Nifty plunged 905 points, but the positions were left open, overnight. Please note, that Put covariance neutralized in Bank Nifty when the market was soaring with confidence about the upcoming outcome of GDP data. It cannot just be coincidence every time. Smart money already was aware about the rise in GDP rate and hence covered their shorts post 12 PM on Thursday.
Red circle is the Institutional buying which was confirmed in first 60 mins and opening above yesterday's high is called Rejection by seller's price.
Today’s Bounce Back
Today’s session was very interesting from the Options Greeks point of view. The market opened 97 points gap up. The institutions covered their shorts. The striking part is, the Call covariance neutralized in the weekly 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 46,300 put option sold @ INR 260. It was eventually covered at INR 130, But why did it take only 3 hours for the Puts to fall? You are right if you thought “Institutional buying”. Let’s keep in mind that today's longs have been built by smart money (as showed in 3D delta screenshot in red circle). Does this mean, the market will rise on Saturday? Let’s leave that decision to the markets makers on Saturday.
PS: We had a heavy trading day today by selling 6 strikes in puts. (Rejection in auction process was a contributing factor). Strikes sold were 46,300 PE, 46,400 PE, 46,800 PE, 47,000 PE, etc.
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