Exit Poll Impact
India’s benchmark Nifty opened 211 points gap up today as exit polls announced big wins for the BJP-led National Democratic Alliance (NDA) over the weekend. Exit polls indicated that the ruling party would win anywhere between 280 and 315 seats and form a confident government with full majority. Backed by massive euphoria, Nifty opened gap up, but institutions forced the market to pause at 11700 with meticulous precision because they had to cover what they had sold at 11690 back on the 7th of May. The institutions used logarithmic differentiation in congruence with Vega shift to trigger 99 points fall in Nifty till 11601 and successfully wrapped up their positions in profit despite all the positive news and a 29% drop in India VIX.
Why Did The Market Rally?
The most important factor today was the tapering of the IV as the market discounted the election uncertainty to a large extent and India Vix plunged to 20. Today’s gap up opening triggered a buying freeze in Call options and the 3D Delta software captured the institutional activity accurately despite the massive swings due to shifts in volatility. The big plus was it helped identify the upside target of 11800, even as abnormal expansion and contraction of volatility continued to sway the Call option gamma.
Take, for example, the market opened gap up and then paused at 11700. This is where the equation changed; the institutions used 3 different strategies to turn the tables in their favor.
1. Used logarithmic differentiation and forced the market down by 99 points to a low of 11601 before achieving the upside target of 11800.
2. Used the IV tapering to squeeze out event premiums from Put options.
3. Created long in futures and bought Call options at the same time.
Did The Institutions Win?
Simply put, the institutions registered a massive win, even if we consider that they did not know the outcome of the Exit polls last Friday. They built positions to push Nifty to a high of 11800 for today’s session. In other words, even if we consider that the institutions missed out the 200 points gap up, they made up by turning the market around from 11601 to a high of 11800.
To replicate what the institutions did today, the 11800 Put options were sold @ 281 to squeeze out the excess event premium as the IV tapered down. The position was later covered @ 240 as India Vix stabilized around 23.
For the aggressive part, Nifty future was bought @ 11662 and the 11800 Call option was also bought @ 164 despite a 211 points gap up opening.
Long positions in Nifty were squared off @ 11800 and the Call option was booked @ 261.