Bank Nifty's unpredictibility is a Gold Mine for sharp traders. One made 400% gain from Call Options

M2M plunges from profit of Rs 7 Lakh to loss of Rs 89 Lakh in the blink of an eye

The Bank Nifty is infamous for its random and violent moves. It can surge or plunge several hundreds of points in the blink of an eye, causing joy or despair to traders.

Yesterday is one such classic example of the Bank Nifty's eccentricity. It was cruising in a sedate manner within a range. Suddenly, at 1500 hours, without any warning or provocation, it plunged a mammoth 262 points, triggering stop losses of the Bulls. While the Bears rushed in to capitalize on the plunge, it reversed and surged 200+ points, triggering their stop losses as well.

At the EOD, both Bulls and Bears were left battered and bruised.



Expert trader Mitesh Patel lamented the situation. "3 pm candle, M2M + 7L to -89 L, Ek din to bada jatka lagega.." he stated.



He warned that more drastic movement can be expected which can ruin sellers with un-hedged or naked positions.



Sellers congregate around round strikes. They panic if the Index approaches that level

On an earlier occasion, expert trader Ghanshyam had explained that big Option sellers such as FIIs, DIIs and HNIs congregate around round strikes in the Indices such as 42500, 43000, 43500 etc as these have the most liquidity. When the Index approaches the round numbers, the sellers of these strikes want to exit by buying back the options.

Others players are aware of this and watching. They begin to buy. The dual action of the sellers exiting and new buyers entering means that the prices have nowhere to go but up. This attracts more buyers and also puts immense pressure on the shorters.

So, the entire exercise becomes a self-fulfilling prophecy.

Ghanshyam explained that it is a simple matter of our watching the screen and focusing on the round strikes. We should also keep an eye on the Open Interest in the Option Chain. When the Open Interest in the Calls starts decreasing, it is a sure sign that the Bears are covering their shorts. (see How we could have also benefitted from Yesterday's spectacular move of 1200 points on the Bank Nifty)

When the resistance broke, 43000CE gave 400% gain

Ghanshyam executed this strategy with perfection during the expiry of Thursday, 29th December 2022. The Bank Nifty opened in a subdued manner at 42500 and was meandering about with a downward bias for most of the day.

This sedate activity encouraged sellers to sell heavy number of Calls of the strike price 42700 and upwards. The heaviest Open Interest was obviously at the 43000CE as it has the most liquidity.

Ghanshyam was examining the chart minutely. When there was a big green candle at 1300 IST, he sensed that there would be a game changer action in play.

Thereafter, we can see from the Chart that there was a strong upward movement of the Index. This prompted the Call sellers to cover their shorts at each level and shift to higher levels. The short-covering action in turn prompted the Indices to go higher, leading to more short-covering, which led to more upward movement and so on.



In an earlier episode, Ghanshaym has explained the importance that we have to mark out on the chart the key levels of support and resistance. When either of these are broken, we have to move in and capitalize on the short-covering actiion (see Bank Nifty LDCHL Trading Strategy by Ghanshyam, his "All Time Hit Option")

In the present episode, Ghanshyam explained precisely which candle signified the break of resistance and why it became imminent that short-covering would happen.

Dont' gamble on Hero-Zero Calls

Ghanshyam emphasized that no matter how strong our conviction is, we have to always keep the risk in mind. We should tailor our position size such that we are able to survive even if our view goes hopeless wrong. In this particular episode, he stated that he bought the 43000CE at Rs 45 with the plan to exit if it fell to Rs 20. The loss would be absorbed by the profits he had made in other trades during the day.