India’s benchmark Nifty was riddled with 767 points rally in last 3 trading session despite India VIX remaining below 14. To the naked eye, this week’s move might appear as another day of a normal short covering trading sessions, however, as per the options Greeks calculation, this week was a perfect trading opportunity for the bulls. The important question is why? There were two important aspects that we must take note of. Firstly, on 31st Dec when Nifty spot made new low than 20th Dec low, long dated put options did not make new high (See 23,500 & 23,600 PEs Jan monthly contract highs). The second and most important factor was the covariance factors between the option gamma of specific strikes and their theta components.
How come Amplify rode the entire rally of 767 points right from 31st Dec Low?
The Un-noticed Undervalued Call Options
To understand, this week’s rally, we need to look at the valuation of the 23,600 Call option on the 31st Dec 24. On 31st Dec session, Nifty had made a low of 23,460 at 10:10 am, at the same time; the 23,600 call strike registered a low of INR 384. On 20th December 24, when Nifty made a low of 23,537, the same call made a low of INR 536. Simultaneously, 23,600 put strikes did not make new highs. This is where mispricing was triggered in 23,600 call options. We need to keep in mind that 31st Dec 24 mispricing led to an undervaluation of the 23,600 Call strike. Since undervaluation in options often leads to big swings to bridge the time value gap, we bought the Call option @ INR 147 and hedged it with 23,850 calls @ INR 48 in the equal ratio and carried overnight. The spread was done at INR 99 a lot. The same spread was squared off on 2nd January at INR 252 a lot. That’s a whopping 250% in a single spread. Mind you, we tracked monthly contracts but traded in weekly. Tracking monthly contracts gives a good idea about smart money hedgers.
The Hidden Overvaluation Sell-off
In today’s session (3rd Jan 2024), Nifty opened at 24,196 and the high was the same. Around todays high, the gamma and the theta covariance factor of the 23,600 Calls (monthly) were exorbitantly high. This was a big opportunity for scalpers. Three factors that supported the selling were the massive expansion in the 23,600 call option premium above its fair value, India VIX below 14 and the acceleration in theta decay. Today’s 200 point selling could’ve also been identified before 2nd Jan’s close. HOW? The premium between future and spot was running at 164 on 1st Jan 25 and closed at 84 on 2nd Jan 25. Premium was shrunk by 50%. Coincidence? Not at all.Remember, nothing in this world is random, that’s why we always say,
on 12th January 2025, we are doing first Meet-Up in Mumbai. To know more, Give your attendance on the link below here and we shall get back to you with confirmation. Your chance to understand what Amplify does and how we do it! Some prominent Industry Experts will be joining as well.
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