Choices writers have been caught off guard by freak actions within the underlying indices final month, leading to losses operating into lots of of crores for big particular person merchants, stated two individuals within the know.

The choices strike costs noticed uncommon spikes on a minimum of three days, all inside just a few micro-seconds, triggering widespread cease losses and trapping merchants on the lookout for an exit.

Such spikes have spooked many rich particular person possibility writers who’ve stopped buying and selling or are re-evaluating their methods. Buzz on the Avenue is that some giant excessive frequency merchants (HFT) could also be accountable for the sudden spikes.

  • Learn: Retail, rich merchants flip to riskier choices writing

On April 12, the at-the-money choices worth for Sensex, as an example, surged from ₹116 to ₹750 inside just a few seconds, leading to important losses, particularly on the 74,700 PE (put choices).

Momentary spikes

In keeping with Devarsh Vakil, Deputy Head of Retail Analysis at HDFC Securities, such momentary spikes in costs have additionally been seen in Nifty Monetary Companies.

“Costs come again to regular, however the stop-loss orders get triggered leading to choices writers dropping some huge cash.

“Nifty Monetary Companies and Sensex are extra susceptible as a result of they’re comparatively newer entrants within the derivatives area and have skinny volumes in some strike costs,” he stated.

To be clear, spikes in choices strike costs have been seen in some form or type since 2021, when retail volumes began to select up.

The spikes, nonetheless, have been smaller and correlated with the index and will end in losses of 3-4 per cent for these leveraged and 1-1.5 per cent for many who weren’t.

However the spikes have shot up prior to now few months after the onset of zero-dated choices buying and selling, the place day-after-day is an expiry. The spikes seen in April resulted in losses of 7-10 per cent for many who had not hedged their positions.

Counter trades

“The motion in Sensex choices on April 12 is peculiar as a result of whereas the choices costs spiked, Sensex Spot didn’t transfer in any respect. After which it took virtually three minutes for the spot and choices costs to converge,” stated an choices dealer.

An electronic mail despatched to the exchanges didn’t get a right away response.

Specialists blame the bizarre exercise on potential counter trades positioned by HFTs. “If it occurred simply as soon as, it might be attributed to crowded trades or methods or some noise available in the market. However an everyday incidence signifies there may be some alpha available in the market that has been in a position to exploit choices writers’ positions,” stated the choices dealer. Crowding of trades in zero-dated choices by these with only some lakhs of rupees to punt may be accountable.

“Algo buying and selling funds can sniff out helps and resistances based mostly on the volumes getting triggered at every stage. If HFTs determine that they will trigger a whole lot of volatility and set off stop-losses for every kind of traders and make a killing, they may. It’s not manipulation, it’s their enterprise mannequin,” stated the top of an choices buying and selling platform.

His recommendation to retail traders: Avoid zero-dated choices. “HFTs have tens of millions of {dollars} at their disposal and their APIs can set off lots of of orders each second. Orders for retail merchants can be restricted to could also be 10 a second,” he stated. “It’s like attempting to win a Formulation One race by driving an Alto.”

Pointers: Spikes inside just a few secs

Nifty Midcap Choose, April 8: The ATM choices worth surged from ₹16 to ₹250. Max losses: 10925 PE (put choices)

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

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

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