India’s benchmark Nifty future has tanked 150 points intraday after opening at 11310 in the morning. The surprising part is India Vix has failed to climb above 14 despite Nifty plunging down to 11175. Today’s closing at 11224 has given rise to a wide range of questions. The most important one is, “why did the seller book profits intraday”?
Why Did The Seller Booked Profits?
In a surprise turn of events, sellers have booked positions intraday despite Nifty closing at 11224, which is below the previous day’s low of 11247. The Put options gamma also witnessed an uneven contraction today. Uneven contractions in Put options gamma can be triggered in the event of a significant drop in the market volatility. In today’s session, India Vix has closed at 13.06, which is above the previous closing of 12.13 approx. That leaves us with the possibility of new information hitting the market. In a recent interview, former Federal Reserve Chair Janet Yellen said that she expects the Fed to cut rates by 25-basis-points. Option calculations are also indicating that the possibility of a rate cut is exactly what is causing the contraction in the Put options gamma. This could be the reason why the sellers have booked profits intraday.
Will Selling Continue?
Although the Fed is expected to cut rates on Wednesday, it is primarily a temporary risk management metric against global headwinds and not the beginning of a prolonged rate cut cycle. Thus future rate cuts might not be guaranteed. The market makers are building their positions around tomorrow’s range high and range low. Selling will continue only if the gamma and vega covariance factors of Put option neutralize and Nifty drops below tomorrow’s range low, else not.