India’s benchmark Nifty futures tanked 150 points today. The index had zoomed up 485 points in the past two trading sessions and registered a high of 11133 yesterday. In today’s session, the institutional traders initiated profit booking around 11108. Market participants were divided into two schools of thought today. Some saw the 150 points fall as selling, while others labeled it as profit taking. Let’s find out what the institutional traders had to say.
Selling Or Profit Booking?
Nifty Futures opened at 11103 in the morning and tested yesterday’s high of 11133. The institutional traders started wrapping up long positions around 11108. We need to keep in mind here that they did not initiate outright shorts today. The 150 points fall had a mathematical element of surprise as the move was pre planned by market makers. Retail clients also can replicate these moves if they can determine the point where the theta overshoots its neutral threshold. We all know that the August Futures contract will merge with the underlying tomorrow. This move will trigger a stunning acceleration in theta decay. Therefore the idea is to take advantage of this thumb rule with the help of specific option strike analysis.
The Call and Put Analysis
To find out more about the institutional positions, we bought the 11000 Put options around the same area where profit booking was initiated by the market makers. Next, we sold the 11100 Call option, 40 points below the Put entry zone. The idea was to capture whether the magnitude of time decay in the Call option was higher than the magnitude of expansion in the Put option. Let us keep in mind that we stacked the odds in favor of the Put option. The Put was bought at Rs.25 first and then the Call option was sold at Rs.34 (40 points below the Put trade zone). Nifty fell 100 points, and the Put gained 92%. The Call option lost 56% due to a fall of 60 points. We can conclude the from the above position, that it will be fair to classify today’s fall as a profit booking move and not selling per se.