India benchmark index- Nifty closed at 18,321 today (25th May 2023) i.e. the May expiry day. Nifty remained in a range of 400 points for the May expiry registering the high of 18,459 and low of 18,042. What’s driving crazy in trader’s community is, Should we trade breakout above 18,458 or breakdown below 18,042? In today’s article we shall discuss how the institutional trader’s successfully pulled off a painfully slow range run of 400 points between 18,050 and 18,450 and why 18,300 remained the star boy level.
The Inception point
In order to understand the starting point of this slow range, let us take a close look at what the institutional traders did in the last couple of weeks. Under normal circumstances, market makers would generally buy Call options and short Put options during a bull run and vice versa during a bear market. Surprising as it may sound, and I bet no one made a note of this. One day before respective weekly expiry i.e 10th May, 17th May and 24th May 2023, see where nifty spot opened.
11th May Expiry – Nifty opened at 18,314 on Wednesday (10th May)
18th May Expiry – Nifty opened at 18,300 on Wednesday (17th May)
25th May Expiry – Nifty opened at 18,301 on Wednesday (24th May)
What does this mean? And why is 18,300 so important that every week a day prior to expiry nifty always opened near 18,300?
Decoding 18,300 Level
Now, let us look at premiums. When market falls, it’s a given that put premiums must rise exponentially in comparison to fall in calls. When the reverse happens, mispricing opportunity takes place and you shall witness sharp reversals. For any selling to occur in the market, put premiums have to reach a point where Vega-Theta correlation is positive, only then put sellers will wrap up their positions. The fall witnessed from 16th may to 19th may turned every trader into a bear mode, but, did premium turn into bear mode?
Moral of the story
After 1st weekly expiry, 18,300 was the preferred theta decay zone cornered by the Smart Money. All three weekly expiries opened at 18,300 a day prior to their expiry, COINCIDENCE? It wasn’t. Technical charts would give you Babaji ka thulu, but premiums gave you opportunities.
Premiums never lie and cannot lie. Still wondering how it happened? Enrol to our June batch and experience and learn the calculations. It’s as simple as that.