Implied Volatility Estimation
Bank Nifty witnessed a 400 points upside swing in favor of the buyers today. The index bounced back from the low of 31250 and registered a high of 31642, after closing in the neutral zone yesterday. There are three critical questions that we shall cover today.
- Is this simply a swing backed by euphoric expectations from NDA?
- Can we identify these expiry day swings?
- Is it possible to trade these big swings?
Truth be told, Bank Nifty expiry swings can be captured and traded with the help of Implied Volatility Estimation. These big swings are mostly positioned in the direction of the news or events prevailing in the current scenario. Take for example today, the NDA will be taking oath to form the government. This is a massive platform for Bank Nifty to trigger a swing. The question is how do you capture it?
How Can Retail Traders Execute Bank Nifty Expiry Swings?
Bank Nifty attracts uneven expansion in volatility on the last day of the expiry. This triggers explosive theta decay on the options strike that is on the opposite side of the trend. Based on this simple principle, the 3D Delta system tracks the covariance factors between the Theta and Vega of specific strikes. The data points are then correlated with the future time curve to identify where the index is likely to close at expiration. The most important factor here is the “Time Of Execution”. Retail traders can also use these methods to capture the Bank Nifty expiry day trades with ultra low risk exposure to the market.
Bank Nifty Trade Execution With Ultra Low Risk
In today’s session, the 3D delta system used IV estimation and concluded that the index had a 85% possibility of settling around 31550.
To check the accuracy of the system, the 31500 Put options was sold and 31500 Call option was bought around the last 40 minutes of trade. Traders here must take note that “time is of essence”, since the Call option should ride the volatility swing and the Put option need to be crushed by the weight of the theta decay.
The 31500 Call option was bought @ Rs.10 and squared off @ 44. A swift 340% return under 10 minutes. The 31500 Put option was sold @ 66 and booked @ Rs.6. This trade generated 90% returns in the same time.