In the fast-paced world of finance, where every moment matters, traders are always on the lookout for chances to make money and reap some benefits through price movement. One of the most exciting times in the trading world is when options contracts are about to expire. This is especially true in India, where only the Nifty 50 and Sensex indices now have weekly expiry contracts, while other indices like Nifty Bank, Nifty Financial Services, and Nifty Midcap Select are limited to monthly expiries under the new SEBI regulations.
Options trading is more popular because it allows traders to use their small capital to potentially make a significant amount of money. The real excitement kicks in on expiry day, when even options contracts that seemed unlikely to be available at very cheap prices, sometimes costing just a few bucks. This piques the interest of seasoned traders and new investors alike.
Today, we delve into the unfolding scenario of how options contract prices surge within mere minutes, offering a glimpse into the rapid-fire dynamics of the trading floor.
The Rush of Expiry Day
As the clock ticks closer to the expiry bell, the atmosphere on the trading floor becomes charged with anticipation. Traders meticulously analyse price movements, keeping a keen eye on both in-the-money and out-of-the-money options contracts. It’s a high-stakes game where fortunes can change in the blink of an eye. The same scenario unfolded in today’s trading session as we closely observed the movements of the Nifty index since the beginning of the day.
Today, the Indian market opened in the green, with a gap up compared to Tuesday’s closing levels. However, it fell and breached the low of the first 15-minute candle during the early morning session. Eventually, it found support at around Tuesday’s closing levels. After establishing a solid support base, it rallied and broke today’s high, surging over 170 points from its low point. Further, showing strong momentum, it began to consolidate at higher levels, attracting buyers at these levels.
Despite a solid consolidation of over 2 hours and the creation of a good support base, the market witnessed a sharp decline within minutes as it broke out of the consolidation phase and trapped all the buyers accumulated in the consolidation phase. Illustrated in the below chart of the Nifty 50 in a 1-minute timeframe, the candle formed and closed at 1:26 PM, representing a drop of 123 points or 0.55%. Subsequently, the candle at 1:27 PM recorded a decline of around 85 points. In total, the market experienced a fall of over 200 points within just 2 minutes of trading.
Now, let’s delve into the movements of options prices during this period, focusing on both the At-The-Money (ATM) options and Out-of-The-Money (OTM) Put option contract prices of Nifty50 within the same 1-minute timeframe.
Starting from the OTM options (22,200 Put Option) price analysis before the price surged, it was trading at around ₹13.55 per lot, which eventually spiked around 2150% in just two minutes and touched a high of ₹305 per lot.
On the other hand, the ATM options (22,300 Put Options) spiked over 854% in the same period. From ₹40 per lot, it touched a peak of ₹392 per lot.
Let’s say someone had short-sold these put options. They would have faced a massive loss, one cannot imagine, as traders who short the market face losses when option prices increase and make profits when option prices decay or lose their value. Meanwhile, options buyers have made a handsome profit in one trade or just a few seconds.
Conclusion
Trading on expiry days poses high risks, exemplified by today’s extreme price swings. Within minutes, option prices surged exponentially, with Out-of-The-Money (OTM) and At-The-Money (ATM) options spiking by over 2000% and 850% respectively. Short sellers faced significant losses, while buyers reaped quick profits. This highlights the volatile nature of expiry-day trading, demanding a deep understanding of market dynamics and risk management.
Disclaimer: This post has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
