Hello,
Many times I have seen that abnormalities.
On 12th March 2021, I have seen that, Nitty index is falling from 15330 to 14950 aprox and closed around 15050.
However,on the same day, the price of Nifty CE Stricks from15700 to 16500 is increased and it last trade price is almost 50% more than its previous closed price.
Why this happened ?
May I please to have experts openion on this.
@prakash.umaretiya I don’t know if I am an expert or not but this is my opinion.
Due to new peak margin rule many of intraday trader and few positional traders (in some cases) are buying OTM calls to decrease their cost. This led to increase in price of OTM options. Let me be more clear.
Earlier, before the new margin rule was introduced intraday traders were able to take 4 lots of a sell position through margin given by broker. But now after few phases of new margin rules came into effect they are able to take only 2 positions with same capital. So profit they get everyday decreases. So in order to bring their cost down of sell option they are additionally buying far OTM options. This brings down their margin required drastically. So they can take few extra lost and get equal profits as they were getting earlier. This caused a lot of demand in far OTM options and thus prices are increasing. I am an positional trader even I did this few times.
If it is still not clear what is said this is a practical example:
My capital : 2 lakhs
Cost of selling CE : 1.7 lakhs
If market is going down selling CE is done
So with my 2 lakhs I can only sell 1 lot
So I sell 15000 CE.
But combined cost of buying CE and selling CE of different strike is approx 50k
So if I sell 15000 CE along with buying 15500 CE I can do 4 lots and I get more profit than selling 1 lot of CE and also limit my loss .
So this buying of far OTM options to save margin led to increasing in prices even if market goes in opposite direction.
NOTE:
This is just my opinion and my understanding of it. The actual reason may be different, but this is what I understood from my past experience. Hope it helps.
Isn’t this like a risk to both the option buyer and the seller? But well, what can I say? Not that SEBI can be wrong on anything.
@Avi_Garg Yes… HNI clients have no problem. But retail option sellers have risk but that is easily adjustable. But problem is for option buyers. I also observed one thing, after the start of 2021 India VIX hasn’t closed below 19, not even a single day. In normal market conditions VIX will be around 15 to 17. This indicates options premiums are higher. Buying at higher price means taking more risk. So option buyer should be skilled enough to trade in this high vix conditions.