In a surprising turn of events, India’s benchmark Nifty was riddled with excessive volatility in today’s session despite India Vix remaining below 13. To the naked eye, today’s move might appear as another day of a choppy trading session, however, as per the options Greeks calculation, today was a perfect trading opportunity for the scalper. The important question is why? There were two important aspects that we must take note of. Firstly, today was the last day of the July contract. Thus, the acceleration in theta decay allowed enough room for the scalper to sell overvalued options with respect to the time and the price of Nifty futures. The second and most important factor was the covariance factors between the option gamma of specific strikes and their theta components.
What Is Scalping
Scalping is an intraday trading technique that is built to achieve results by quickly swinging in an out of trades. In scalping, the cumulative returns of all the trades take advantage of the erratic moves in the market.
The Undervalued Call Options
To understand, today’s volatile move, we need to look at the valuation of the 11300 Call option on the 24th of July. In yesterday’s session, Nifty had made a low of 11227 at 11:15 am, at the same time, the 11300 call strike registered a low of Rs17. Around 12:30 pm in the afternoon, the index registered a low of 11235. This is where mispricing was triggered in 11300 call options. The Call recorded a low of 12 while Nifty failed to register a fresh low. We need to keep in mind that yesterday’s mispricing led to an undervaluation of the 11300 Call strike. Since undervaluation in options often leads to big swings to bridge the time value gap, we bought the Call option @ Rs.13 and carried overnight.
The Overvaluation Selloff
In today’s session, Nifty opened at 11290 and registered a high of 11354. At this time the 11300 call had generated a whopping return of 383%, creating a massive overvaluation. We booked the position at Rs.53.
Around today’s high, the gamma and the theta covariance factor of the 11300 Call were exorbitantly high. This was a big opportunity for scalpers. Since it was the last day of the July contract the same strike was sold by scalpers. Three factors that supported the selling were the massive expansion in the 11300 call option premium above its fair value, India Vix below 14 and the acceleration in theta decay. At 3:30 pm Nifty closed at 11252 while the 11300 Call option was rendered worthless.