Understanding Nifty And US-China Trade War Concept
Since the news of US-China trade war broke out early this week, India’s benchmark Nifty has tanked 534 points. Institutional traders used the opportunity intelligently. The small step is to understand the news, the big leap is to use options greek calculations to analyze the direction of Nifty due to the impact of the news. Even if you don’t understand the news fully, it does not matter as long as you have the math right.
So Why Did Nifty Panic And Fall?
Simply put, the US President Donald Trump wants China to buy more US goods to bridge the trade deficit of $419 billion with China. Thus, Trump decided, tariffs on Chinese goods would rise to 25% from 10% at the start of this year, but the hike was delayed. News channels announced last Saturday that Trump would increase the tariffs effective the coming Friday because talks with Beijing were progressing very slowly. This is what caused the market to panic and Nifty’s selling started.
How Can Retail Traders Catch The Sell Off Early
Retail traders generally combine three aspects.
- Change In Open Interest
- Technical Charts
Truth be told, retail traders never focus on the mathematical aspects of Black Scholes Option pricing. By correlating the binomial pricing of options with the Vega shift one can catch the direction of the market right before a massive sell off or a buy breakout takes place. This is how institutional traders walk in and out of a trend smoothly. Advance software like 3D Delta profile can spot the institutions every time they make the big move.
Using The Option Greeks To Trade Nifty
Retail traders must use smart covariance factors in combination with option Greeks to trade instruments like Nifty or Bank Nifty. Take for example the 11400 Put option that was bought when the 3D Delta software indicated that the Gamma – Vega covariance neutralized at 11690 on May 7th.
Same strikes were traded to replicate the model that the institutions used and the 11400 Put was bought @ 206 on the 7th of May. The position was squared off the next day @ 288 due to the inverse drift in the Implied volatility. Buying the 11400 Put on the 7th May was the easy part, but the smart move was to buy the 10800 Put alongside and carry it forward, so that once the 11400 Put is squared off on the 8th May, the profits from the trade off will convert the 10800 Put into a risk-free trade. One needs to keep in mind that 3D software had confirmed that the trend was a sell, this is the confirmation that helped create such a trade.
Risk Free Position
Institutional traders played it smart, they bought the 11400 Put @ 206 and the 10800 Put @ 69 when the market hit 11690 on the 7th May. The drift in implied volatility led them to book positions in 11400 Put on the 8th of May, which generated a profit of Rs.82/ lot. This profit neutralized the investment in 10800 Put to zero. The institutions did not have anything to lose here on. Thus, the long position in 10800 Put was carried overnight and was squared off in the 2nd half today @ 125. This helped them retain what they missed out in 11400 Put when marked plunged to 11291 today.
Bank Nifty Options Data