Identification Of The Big Swings
Bank Nifty weekly contracts throw up big opportunities for intraday options traders. In today’s session, the banking index opened around 30098 approx but failed to trigger a buy breakout despite hitting a high of 30249. The important question is why? Traders must understand although Bank Nifty is a volatile instrument, the trick lies is in identifying when the index will witness high volatility. There are trading systems that can be used for swing trades and momentum trades. The best model amongst themes IV Estimation System.
Understanding The IV-E System
The IV Estimation System works on the concept that there are weeks where volatility will be low, while other weeks will witness high volatility swings. This is based on simple options principle and tracks the covariance factors between the Theta and Vega. The data points are then correlated with a future time curve to identify the week or day when Bank Nifty will witness high volatility. There’s enough evidence to believe that fund house and algo desks are increasingly relying on this method to create intelligent option spreads by identifying the congruence of the futures price with the Implied Volatility of specific strikes.
Advantage Of The System
The advantage lies in trading only when volatility will be high. This is what helps the trader turn an option worth Rs100 into Rs 400 in one big swing. Retail traders also, can design these strategies with the help of the Black Scholes formula. In Bank Nifty the options vega is high in absolute terms. This makes the gamma of the weekly options highly sensitive to small changes in volatility leading to massive payouts in the short term.
How To Build The System
The IV Estimation system is constructed by connecting specific points when the gamma-vega covariance factors fall in line with the Binomial price. Bank Nifty weekly traders can execute this opportunity at least once every week on an average. These are the zones where Institutional Traders activate their trades and rope in the lions share of profit. Take for example today’s scenario, the IV-E system indicated that volatility is likely to remain relatively low. To test the accuracy of the system, Call options of 30600 strike were bought @ 25 today. The Call options should have become Rs.120 during a specific time of the day if the system had made an error. The Call option hit a maximum high of Rs.35. The long position was squared off at Rs.30. The system was spot on with the calculations. It is a well-known fact that high volatility in Bank Nifty allows fund houses to multiply their returns exponentially on the same day. They wait till the options theta meticulously balances the mathematical collocation of Vega and Gamma, ultimately converting their strikes into covered positions as soon as the option moves in the money.
What Should Retail Traders Do
Retail traders must first understand the correlation between binomial options pricing and Bank Nifty swings. Secondly, retail clients must limit their exposures to 5 -20 lots max. Third, since risk is very low in these strikes, one must hold with trailing stop loss. The impact of high Vega during the upcoming elections might increase the frequency of these opportunities every week for day traders. Short term and swing traders must keep in mind, that this process should not be executed with technical charts or OI data. There must be a defined edge for retail clients if they want to match the algorithmic speeds or money power of institutional traders. Bank Nifty is a volatile instrument thus software based executions work splendidly well for day traders.
Understand The Psychology Of Institutional Traders
What separates institutional traders from the retail is the difference in trading psychology. Retail relies on slow tools like discounted brokerage, delayed charts and delayed OI Data, etc. Institutions focus on big money, they trap the retail clients with their discipline, knowledge, and tools. Subtle aspects like the selection of an option strike based on the congruence of futures price and the Implied volatility of the strike. These methods offset the theta dilation of the strike by virtue of the moneyness. This is what retail clients must practice seeing a radical change in results.
Bank Nifty Options Data