Options writers were caught off guard by freak movements in the underlying indices last month, resulting in losses running into hundreds of crores for large individual traders, said two people in the know.

The options strike prices saw unusual spikes on at least three days, all within a few micro-seconds, triggering widespread stop losses and trapping traders looking for an exit.

Such spikes have spooked many wealthy individual option writers who have stopped trading or are re-evaluating their strategies. Buzz on the Street is that some large high frequency traders (HFT) may be responsible for the sudden spikes.

On April 12, the at-the-money options price for Sensex, for instance, surged from ₹116 to ₹750 within a few seconds, resulting in significant losses, especially at the 74,700 PE (put options).

Momentary spikes

According to Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities, such momentary spikes in prices have also been seen in Nifty Financial Services.

“Prices come back to normal, but the stop-loss orders get triggered resulting in options writers losing a lot of money.

“Nifty Financial Services and Sensex are more vulnerable because they are relatively newer entrants in the derivatives space and have thin volumes in some strike prices,” he said.

To be clear, spikes in options strike prices have been seen in some shape or form since 2021, when retail volumes started to pick up.

The spikes, however, were smaller and correlated with the index and could result in losses of 3-4 per cent for those leveraged and 1-1.5 per cent for those who were not.

But the spikes have shot up in the past few months after the onset of zero-dated options trading, where every day is an expiry. The spikes seen in April resulted in losses of 7-10 per cent for those who had not hedged their positions.

Counter trades

“The movement in Sensex options on April 12 is peculiar because while the options prices spiked, Sensex Spot didn’t move at all. And then it took almost three minutes for the spot and options prices to converge,” said an options trader.

An email sent to the exchanges did not get an immediate response.

Experts blame the unusual activity on possible counter trades placed by HFTs. “If it happened just once, it could be attributed to crowded trades or strategies or some noise in the market. But a regular occurrence indicates there is some alpha in the market that has been able to exploit options writers’ positions,” said the options trader. Crowding of trades in zero-dated options by those with only a few lakhs of rupees to punt could also be responsible.

“Algo trading funds can sniff out supports and resistances based on the volumes getting triggered at each level. If HFTs figure that they can cause a lot of volatility and trigger stop-losses for all kinds of investors and make a killing, they will. It’s not manipulation, it’s their business model,” said the head of an options trading platform.

His advice to retail investors: Stay away from zero-dated options. “HFTs have millions of dollars at their disposal and their APIs can trigger hundreds of orders every second. Orders for retail traders would be limited to may be 10 a second,” he said. “It’s like trying to win a Formula One race by driving an Alto.”

Pointers: Spikes within a few secs

Nifty Midcap Select, April 8: The ATM options price surged from ₹16 to ₹250. Max losses: 10925 PE (put options)

Sensex, April 12: The ATM options price rose from ₹116 to ₹750. Max losses: 74700 PE

Nifty50, April 18: The ATM options price rose from ₹45 to ₹380.Max losses: 22300 PE and 22250 PE