India’s benchmark Nifty staged a remarkable recovery of 164 points today, despite a sharp fall of 235 points on Tuesday. In today’s session, the index was rigged with excruciating volatility, after opening 80 points gap up around 10999. Let’s execute a clinical analysis of today’s recovery of 164 points and its impact on the Call options.
Understanding The Fall
Nifty had plunged 235 points on Tuesday. The sharp fall triggered an expansion in volatility in the last two trading sessions. Since options are constructed beautifully by an interwoven mesh of volatility and time dilation, we must start with the profit booking in Call options last Friday. The idea is to flow with the actions of the market maker. When Nifty opened on Tuesday, the covariance factors in the gamma and vega in the Put options neutralized. Let’s not forget that the longs were squared up on Friday. Call it a coincidence or what you may, the institutional sellers created shorts at the same area where the Put neutralized. Thereafter, Nifty plunged 235 points, but the positions were left open, overnight. Please note, that Put covariance neutralized in Nifty when the market was soaring with confidence about the outcome of the Reliance Industries AGM. It cannot just be coincidence every time.
Today’s Bounce Back
Today’s session was very interesting from the Options Greeks point of view. The market opened 80 points gap up. The institutions covered their shorts. The striking part is, the Call covariance neutralized in the monthly contract, due to the massive short covering. There are two schools of thought at this juncture. Some would vouch to go short at rise, others would ask, ‘can we buy”? So here is the answer, “who are we to decide”? Play it to the books. Leave it to the covariance. In today’s case, you were better off buying a Call option at the neutral zone. The 11300 Call option bought @ Rs.28, scaled up to Rs.52. It was eventually covered at Rs.48. But why did it take 4 hours for the Call to rise? You are right if you thought “short covering”. Let’s keep in mind that today’s longs have been squared off all over again. Does this mean, the market will fall on Friday? Let’s leave that decision to the markets makers on Friday.