Why Nifty Is Trading Sideways
India’s benchmark Nifty slipped 43 points intraday and made a low of 11605, after opening at 11648 in the morning. The index bounced off and recovered 72 points from the day’s low and closed at 11670 approx. The important question is why is Nifty trading sideways.
Institutional Traders Have Created Option Ratio
3D delta system and Black Scholes calculations are indicating that Nifty is trading in a small corridor because institutional traders have intelligently built Ratios in both Call and Put options. What is most important is they are expecting big moves and spike in volatility due to election outcomes. The time of occurrence is not important as institutional players have balanced their ratio spreads between theta and vega covariance factors.
What Is The Market Expecting
Option greek calculations are indicating that BJP is likely to win, however, institutional traders are gearing up for all possibilities. Nifty has failed to crack open a clear direction because of the open positions in options ratio, both in Calls and Puts.
How Can Traders Take Advantage
Option trading during elections or other big events can be crafted intelligently with a 60-40 balance between options theta and vega covariance factor. This ratio is generally followed by fund houses as it keeps the door open for big profits in the event of a spike in Volatility, due to the outcome of the event. Fund Houses are placing their trades on the probability of a BJP will win. The 60-40, theta -vega covariance ratio makes the situation conducive to make money from market irrespective of the direction.
Individual traders can fall back on spread strategies in options to take advantage of the elections, rather than vanilla positions with naked calls and put. Spreads involve either taking positions in two or more calls or two or more puts. It must be kept in mind that while using 3D Delta systems or Black Scholes methods, one needs to adjust the calculation of the theta shift with respect to time dilation and market volatility. Below is the example of an intraday trade executed today with the help of Theta – vega covariance. 11800 Call option bought at Rs. 44 and Squared off at Rs. 56.
Bank Nifty Options Data