Options writers make a killing, retail traders lose out

Derivative option writers, mainly large foreign funds that collect premium from buyers of Calls and Puts, made a killing, while retail investors and traders were the chief casualties, say experts.

Only 12 hours of trading were left for the February derivative expiry when NSE shut markets. NSE witnesses heightened trading activity days ahead of derivative expiry that falls on last Thursday of every month. Options prices are based on time value, which is Theta — the rate of decline in the value of an options over time; If all other variables are constant, an option will lose value as time draws closer to its maturity.

Theta indicates how much the option’s value will decline every day up to maturity. The NSE tech snag cut-short nearly four hours of crucial time from the Theta of options. Although, NSE extended the trading time by nearly 90 minutes, it was largely of no use as the stock brokers did not allow their clients to take new positions. In a nearly-closed market, FPI net purchase in cash market was ₹28,700 crore. After 3.45 pm, more than 60 per cent of open interest change in Bank Nifty. And 10.8 lakh contracts on Nifty traded unusually.

Call and put options chain shows price disruption of 50-300 per cent for various in-the-money and out-of-the-money strike price of indices and stocks between 11.40 am when NSE shut markets and extended trading that lasted up to 5 pm.

The share price of most-traded derivative stocks, including Bajaj Finance, Indian Oil and Tata Steel, witnessed a price variation of 5-20 per cent as they crashed sharply on BSE between 11.40 am and 3.30 pm when NSE halted trading, and recovered most of their loss during NSE’s extended trading hours. In the extended trading hours, retail traders were largely absent and could not do usual activity. Effectively, they squared-off their positions before 3.30 when prices were falling, and could not re-enter markets when prices started rising, brokers said.

Majority of tech-driven brokers had put their client positions on auto square-off mode because till around 3 pm, it was not clear if NSE — with 90 per cent volume monopoly — would open for trading.Brokers say the height of manipulation and unusual disruption was evident when the Nifty futures hit a high of 15,524 even as spot Nifty 50 was trading at around 14,900 — a 600-point or 4 per cent spread unseen ever in the world.

Tweet surprise

Another surprise element was Finance Minister Nirmala Sitharaman’s tweet at 4.07 pm saying the government had lifted embargo on providing business to private banks. The Bank Nifty index, which was witnessing price and data feed issues since the morning, shot up nearly 1,400 points during the extended trading hours. Around a 800-points rise in the Bank Nifty came after Sitharaman’s positive tweet, data and price charts show.

“Time decay of options is exponential. A day ahead of expiry, if crucial trading hours are lost unexpectedly, traders panic and have to square-off anyhow, giving windfall to option writers. It creates a moral hazard since you cannot assess and disgorge such expected profits of writers. Wednesday’s event shows how liquidity has got coalesced at NSE and coaxing everybody to trade only on one exchange. SEBI should consider fungible and uniform settlement so that liquidity gets distributed also at BSE, at least during crises,” said Sushil Kedia, founder, Kedianomics, and derivatives expert.

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