Theta – Vega Equilibrium In Nifty
India’s benchmark Nifty failed to trigger a clear break out this week. However, this week carved out massive opportunities for ratio traders. The index oscillated in a perfect curve that nullified the impacts of strong vega shifts despite India Vix hovering around 21. These curvatures are generally formed when charts form a perfect Doji. Ratios created by Institutional traders balanced the index between the theta and vega premiums over the week. This phenomenon is very similar to a discrete-time stochastic process where the value of a variable can change only at certain fixed points in time.
What Did Institutional Traders Do
Institutional traders created ratios both with Call and Put options and allowed the spread to lag behind the continuous time stochastic process. The mathematical application of this process leads to massive payouts if the market remains confined in a range while India Vix continues to rise. Traders must keep in mind that price fluctuations in derivatives are restricted to discrete values, however, continuous rise in vega variable and dilation of time proved to be a highly profitable model for ratio traders this week.
How Can Retail Traders Profit In Such Scenarios
Retail traders mostly depend on price-based trading via conventional technical charts or tracking Open Interest Data. Unfortunately, both are lagging tools. Options are governed by the principle of the Greeks. The Black Scholes model or 3D delta system has proved time and again that options trading can not only be profitable but also a means of livelihood. Traders using a Theta – Vega covariance model, for example, has been the biggest gainers in the last week. The 3D delta system had clearly indicated that Call and Put ratios were activated in Nifty by institutional traders as they were expecting India Vix to rise while time value gradually melted away. It’s not surprising thus, that Nifty failed to open up a clear direction, while the ratio traders recorded the best possible returns in recent times.
Bank Nifty Options Data