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Problems With BankNifty Options Trading


On 24-May-2018, BANKNIFTY closed at 26016.18:

BankNifty 24-May-2018

But something strange happened. See this image:

BankNifty Option Closing Price on 24-May-18

What is the problem?

Options on the expiry day after trading is over expire worthless if Out Of Money (OTM), or At The Money (ATM), or just have the intrinsic value left for options that are In The Money (ITM).

If you are trading bank nifty weekly options my bank nifty weekly course will help you a lot to trade bank nifty weekly either intraday or positional. You can use these properly hedged strategies to trade in stocks and nifty also.

What is intrinsic value of options?

Intrinsic value of options is the difference between the index/stock price and the strike price of the option. For example if BankNifty spot is 26100 then 26000 CE on expiry day will be trading near the difference between 26100 and 26000:

26100 – 26000 = 100

But sometime they trade below their intrinsic value. A few points is ok and accepted but yesterday something strange was seen. Check the image above. Look closely the closing price of 25800 CE. It closed at 132.90.

Lets us check its intrinsic value:

26016.18 – 25800 = 216.18. But it closed trading at 132.90.

Difference between actual intrinsic value and closing price:

216.18 – 132.90 = 83.28

I have seen difference up to 10-20 points and its common now a days.

Why this happens?

This happens because liquidity is very low in deep In The Money options when it nears expiry and traders trade at whatever rates they get. You see the system decides a rate but if no one is willing to trade at that rate then option will be trading lower than its intrinsic value. System cannot force them to trade at the proper intrinsic value.

If you are an experienced trader you may be knowing that deep out of the money options on bank nifty weekly expiry are traded at lot. Basically traders sell these options to make a quick buck the same day. Sometimes they succeed, sometimes they do not. But frankly trading deep out of the money options is a very dangerous game. One sudden spike may take out months of profits. And if you go very deep you will get like 2-3 points. What will you do with that 2-3 points which will go anyway in brokerages?

So should you sell In The Money Options on expiry day?

This is even more dangerous. What if this does not happen next week? You sell deep In The Money Option and suddenly BankNifty jumps 100 points – then you will find the In The Money Option also jumping 70-80 points straight away. Do not forget that today more than 20% of options are traded on algorithms. As soon as there is a spike these algorithms will take either a stop-loss or get into a buy position to take benefit of spike and eat 5-10 points that they are supposed to do. Yes algorithmic trading is like that. They get into the trade and get out of trade in seconds as soon as they see a profit.

Retail traders are fighting against the algorithmic trading done a lot and massively on expiry day – that is the reason they make money some days and lose it all on other days.

This is the reason you must trade Nifty and BankNifty with proper hedging else you will lose more than you will make on bad days. Over all your trading account will be a loss making business.

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Hi, I am Dilip Shaw, owner of this website. I am a trader like you. I have been trading since 2007, but lost a lot of money till 2010. I then stopped trading and studied options like college exams. Started trading again from 2011 and never looked back since. I did a lot of research, read books and did countless paper-trading before being profitable. You can read about me here.

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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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