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Option Vol’s pricing wild swings on Budget event

Unnerving volatility seen for Indian markets in past couple of days as Nifty corrected ~1k points from 14,700 to 13,700 mark. Index heavy weights (Reliance/HDFC twins) among the key draggers as Nifty shut shop for January series at 13,817 mark lower 1.5% on eoe for expiry basis. Highlights for the January series are a) Sharp pullback on expiry week as BankNifty lost ~10% from top b) Index heavy weights losing leadership Reliance underperforms c) CBOE VIX rallied above 30 mark pushing equity risk premium higher d) Short Gamma trades got trapped as delta moves forced options writers to unwind positions e) Nifty ATM options priced ~30 levels ahead of the budget event.    

Rollovers for Nifty/Bank‐Nifty stood at 77% (1.02cr shrs)/74% (17.8lakh shrs) vs 76% (1.27cr shrs)/78% (14.7lakh shrs) previous month, contrasting data seen as Nifty saw lower rolls ~20% aggregate base lower while Bank Nifty saw shorts carry forward ~22% greater than last month ahead of the budget event. Nifty roll cost dipped sharply on last day of expiry from ~45 to 20 points. Market wide rolls in line with previous month ~91% vs 3month avg. of ~92%. 

FII’s derivative stats, index futures long rolls declined in absolute terms it stood at 73% vs 3month avg. of 81% while index futures short rolls at 64% vs 52% on 3month avg. February series starts with index futures long to short ratio of 1.62x vs 3month avg. of ~2.4x at start of series. On options front, Max. call/put OI on Nifty for February monthly series stands at 14,500 calls (OI 1.5mn) and 14k put (OI ~2.3mn) contracts. Complacency in the leverage positions is taken out ahead of the big event, we expect volatility to continue with Index facing stiff resistance now near 14,200/14350 mark.

Market vs Nifty Rollover

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