India’s benchmark Nifty futures triggered a massive upswing today. The index plunged 500 points in the last 5 trading sessions and registered a low of 10647 today. It’s good to see Nifty fall 500 points and then bounce back sharply by 233 points in a day. Wouldn’t it be interesting if you knew when the index will fall and at what point will it turn around? Today’s bounce back triggered one such contrarian swing opportunity. However, the question is, is it possible to first catch the fall of 500 points and then enter today’s upswing of 233 points? The answer is a Big Yes. Let’s discuss.
Options Counterpoise To Catch Big Moves
In simple words, options counterpoise is a mathematical calculation used by institutional traders during live market hours. This method accurately captures options inefficiencies for specific option strikes at time “t”. The biggest advantage of options counterpoise is, it pinpoints the trend of a derivatives contract accurately. Surprising as it might sound, this derivation of the BSM differential equation is completely risk free.
How Institutional Traders Use This Method
The institutional traders think like bookies. Let us assume two horses “A” and “B”. in a race at time “t”. There must be only two possibilities here. Either “A” will win the race or “B” (Stale mate is not an option). Let us assume, that the market maker has all the inside news. He knows that horse “A” has 80% probability of winning and people are willing to pay Rs500. On the other hand, the odds of “B” winning, is 20%. So people are willing to pay just Rs100 for. Based on inside information, the market maker sets the odds at 1:4. Let is keep in mind that this is exactly the case of news based trading.
Horse “A” wins
The bookie has to pay back Rs500, plus Rs.125, which is a total of Rs625. However we know that the bookie had collected Rs.600 in the beginning (Rs500+Rs100). So his net P/L is loss of Rs. 25 (600-625). Let us keep in mind that he had all the news and still lost money.
Horse “B” wins
The bookie has to pay back Rs100, plus Rs.400, which is a total of Rs500. However we know that the bookie had collected Rs.600 (Rs500+Rs100). So his net P/L is a profit of Rs100 (600-500).
We learned that if the market maker trades based on news, they can lose money, even if they have inside information. So it is fair to conclude that the institutional traders avoid news and use options counterpoise. Thus they make money consistently, as this method is risk free.
Catching today’s Upswing
In the past 4 trading sessions, Nifty fell 500 points. Today is the first time that the institutional traders started wrapping up their shorts. Based on the institutional positions and the counterpoise range, we wrapped up our shorts also and went all out for the upswing. So we followed the footsteps of the market maker and bought the 10800 Call options @57. Thereafter Nifty witnessed a wild swing and registered a high of 10880. The call strike registered a high of Rs.138. The call was squared off at @123, generating a stunning return of 124% in one hour. It is at this time, that news hit the market about FPI Taxes being rolled back.