Options are derivatives and its price is derived from the movements on the underlying.
But does the buildups on calls/puts have an impact on the underlying?
does these contracts cause buying/selling pressure on the underlying and take it up/down?
Can the underlying index move because of the open contracts on options?
yes it does, its not theoretically possible but it happens in reality.
let me try to explain the rationale.
eg: Niftybank index is at XXX, and hdfcbank is at YYY and assuming hdfcbk has a 25% weight on the index. Then every 1 pt decrease in hdfcbk will have the weighted decrease in the index.
if a large group of institution(s) has shorted a Atm+100 CE for the current expiry then they could sell their stake in hdfcbank to lower the banknifty prices.
they just need to calculate how much prices has to be driven down in the top weighted banks to bring down the index by 100pts.
and once the expiry is done they can buy back the sold stake.
Algo trades contribute to this also
Yes indeed. When you have such high stakes in derivatives and also have a lopsided index like BankNifty, anything is possible.
Not at all. It’s always the index movement managed by high speed computational algos, using the constituent stocks.
More than 80% of the trading volume on NSE is of options, and has zero influence on index move.
Why would an institution sell ATM calls? Wouldn’t they be better off buying puts and selling OTM calls against it? (Considering they are long, per your example)
Also, it doesn’t make sense to sell cash holdings only to support short call positions. What if they receive orders to buy more? That would be a trainwreck!
We also have to consider the postions of the counter-party and the hedges they will need to put on.
This answer can become very lengthy. All I am saying is that there’s more than one moving part to consider.
options pinning ! its easy to do on bank nifty