The CNX Nifty zoomed 7.3% from 5,402 to 5,795 in just nine trading sessions of this month, catching many call option writers on the wrong foot. ?Nobody expected the Nifty to climb to 5,800 so quickly,? said Siddharth Bhamre, head (equity derivatives), Angel Broking. According to Bhamre, a lot of call options were written at the 5,600 and 5,700 strike prices, which are now in-the-money. As on September 14 th , 61% of the open interest positions for Nifty call option contracts were found to be in-the-money.
In-the-money call option refers to a situation where the underlying is above the strike price benefitting the call option buyers. The flip side is that the option writers lose. Call Options writers usually make money in a falling market. On September 1, the price of Nifty 5,600 strike call option was Rs 31.6, which has risen to Rs 236.5 today. So someone who has written the above option on September 1 and sold it today would have incurred a loss of Rs 204.9. Similarly, Nifty 5,700 strike call option has surged from Rs 10.45 on September 1 to Rs 154.95 on September 14.
Last week Nifty was facing a resistance at 5,600 levels and was hovering around there for three days. Nifty witnessed fresh shorts entering at these levels with the expectation of market correction,? said Yogesh Radke, head of quantitative research, Edelweiss Securities. ?But Monday, Nifty rallied sharply by 120 points from there and a lot of traders were taken off guard.”
Derivatives experts are ruling out any significant correction in the markets from the current levels due to surplus liquidity. ?Valuations are looking stretched. It?s liquidity that is driving the markets which is evident in the daily FII flows,? said Radke.
A lot of shorts are getting created in the system but at the same time there is a lot of liquidity which will ensure markets won?t fall significantly from current levels,? Bhamre said.
However, Radke warns, ?the move from 5,600 and 5,740 happened on one single day. As a result there isn?t any support between these levels which may result in a downside with the same intensity.?