India’s benchmark Nifty Futures breached the narrow consolidation corridor between 11642 and 11467 and closed above 11650 for the first time since the last 4 trading sessions. In today’s trading, although the index lacked momentum and witnessed slow buying, the 11700 options generated 96% return intraday. The important question is, how did Call options generate such impressive returns despite the slow climb?
The Ratio Cushion
At the onset, we need to keep in mind that the institutional traders had built ratios with Nifty options on the 10th of July. Interestingly they carried their positions overnight, despite an impressive 50% return when the market closed at 3:30 pm yesterday. In today’s session, the ratio clocked 83% returns, at its highest point. What is even more interesting is, today the 3D Delta system indicated that the institutions were long in OTM Call options and they were using their open ratio positions to protect the market from any drastic fall. Time and again we have explained in the past, that when markets makers enter, they trigger an exponential rise in option premiums due to the sheer volume of their transactions no matter how slow the market rises or falls. This explains why Call options generated impressive returns despite the lack of momentum in today’s session.
Replicating today’s Long Position In 11700 Call Options
Since we knew that the institutions were long in the OTM Call Options, we bought the 11700 strike Call to check whether it can generate returns despite the presence of the ratio. The Call option was bought @ 45. The system also indicated that that the upside target was limited, however the RR was conducive. The narrow upside target explained the presence of the ratio. The Call option registered a high of @ 61 when Nifty scaled up to 11662 approx. The position was later squared off @ 60 as the Call option premium failed to expand despite Nifty registering a fresh intraday high of 11672 approx.