India’s benchmark Nifty climbed 100 points intraday and registered a high of 12023. Although the index has risen 223 points in the last three sessions, it has failed to sustain above the 12000 mark. The big question is, “Is this a sell signal ? “
Which Side Will Nifty Tilt?
Option calculations are indicating that Nifty is evenly poised between the buyers and sellers. For an upside breakout to happen, institutional buyers need to participate in the market tomorrow.
Since Nifty is evenly poised, the possibility of a selloff cannot be ruled out. The 3D Delta system is indicating that institutional sellers might enter tomorrow if the market opens gap down and the Gamma – Vega covariance factor of the Put option reaches the neutral point. It is always advisable for option traders to wait till the institutional traders to enter the market. This protects the trader from unnecessary theta decay in options.
So What Happened To Put Option Buyers?
Needless to say, that those who were carrying forward long positions in Put options in the anticipation that markets will fall because the charts say so, actually gained nothing today. The 11800 and 11700 Put option buyers lost almost 24% of their invested value. For a selloff to be triggered, the Gamma-Vega covariance of the Put options need to neutralize. Anticipation does not move the derivatives market, Black Scholes does. Time and again we have educated our readers to use Black Scholes calculations for higher accuracy. Take for example today, Put buyers certainly have lost money due to theta decay. What is more important, even if a selloff is triggered by the institutional sellers here on, the ROI of the Put option buyer will shrink due to loss of premium via theta decay.
Do Retail Clients Have A Way Out?
Yes, indeed they do. They must trade derivates based on the underlying principles of the derivates market. This not only improves, accuracy, but also provides the best entry points for waiting till the institutional sellers enter the market. What are the odds of missing out? Look at it this way, the market definitely did not fall in the last three days just because the retail clients thought so, rather it rose more than 200 points and ate up the premium. Trade smart, wait till the institutions enter the market when the Call or the Put option hits the neutral zone. At the binomial neutral zones, generating 200-300% returns by trading options is a routine phenomenon.