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Option sellers lose shirts as wild price swings rule on Thursday

 Nifty surged from an intraday low of 19,627, minutes after opening, to its high of 19,875.25 at around 2.50 pm. (Photo: Mint)
Nifty surged from an intraday low of 19,627, minutes after opening, to its high of 19,875.25 at around 2.50 pm. (Photo: Mint)

Summary

  • Options facilitate the purchase or sale of an underlying index or stock for a preset price on a future date.

Mumbai: Option sellers make money eight out of 10 times at the expense of option buyers, goes the popular market adage. But, this saying was turned on its head on Thursday’s weekly expiry of Nifty contracts which saw the index swing a wild 248 points between high and low.

Through much of the day, call option sellers were caught on the wrong foot after the Nifty surged from an intraday low of 19,627, minutes after opening, to its high of 19,875.25 at around 2.50 pm. From there it fell by 0.5% or a 110 points to close at 19,765.2.

 

(Graphics: Mint)
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(Graphics: Mint)

The initial rally forced many call sellers to close out their positions at a loss. Those remaining began selling Nifty futures contracts to force the bulls back towards the last 40 minutes of trading, said an analyst who asked not to be named.

This basket selling of Nifty futures resulted in an almost linear, 142-point fall in the Nifty from its intraday high of 19,875 at 2.50 pm to a low of 19,733 at 3.16 pm. It compelled put sellers to buy back the puts they had sold at a huge loss.

For instance , the 19900 put jumped from the day’s low of 16.80 a share (50 shares make one contract) at 2.50 pm to 135, a 700% gain, by closing at 3.30 pm. The 19800 put’s premium rise was at a staggering 6,263% with the price jumping from 55 paise to 35 at close.

On the other side, the 19700 call option which opened at 24 a share, jumped to its intraday high of 192, a whopping 700% rise causing massive losses to call seller. However, from there it plunged by 66% to 65.

“Weekly expiry meant option sellers would protect their positions but heavy intraday volatility meant that both call and put sellers were trap-ped, what we see happening only 20% of the time," Chandan Taparia, head of derivatives research at Motilal Oswal, said.

Agreed quant analyst Kruti Shah of Equirus who said sellers trying to protect their levels were “singed" by volatility on either side on Thursday.

Exchanges like the National Stock Exchange (NSE) offer trading in weekly Nifty and Bank Nifty options which expire on Thursday and Wednesday, respectively. These options are highly popular among proprietary brokers and retail traders.

NSE data shows that prop traders held 50.8% market share in index options in Sept-ember, retail had about 34.8%, FPIs 6.9%, corporates 2.4%, DIIs 0.1% and others 4.9%.

Options facilitate the purchase or sale of an underlying index or stock for a preset price on a future date.

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