Reserve bank of India announced on April 4 at 11:45 am monetary policy slashed Repo rate by 25 bps to 6% ,Moreover with the objective of achieving the medium term target for consumer price index inflation of 4%
with supporting growth.
Rate cut usually boost liquidity in the economy with
positive sentiment booster. Even loans with a low rate lead to an increase in buying interest in consumer driven economy
where strong demand for house loan
and auto loan expected.
Basically benefit of rate cut
seen in sector like.....
Banking , NBFC, Infrastructure and
Real Estate.
Let's discuss impact of
monetary policy on bank nifty option
Bank nifty close on 3rd April at 30330.90
Spot close at 30093.30
Let's take call put rate of 3rd April close
Expiry 25 April
30300 CE 561.50 RS.
30300 PE 544.30 RS.
Expiry 11 April
30300 CE 305 RS.
30300 PE 344 RS.
Outcome of option pricing after Monetary policy .....
A) Due to event of monetary policy there was uncertainty regarding rate cut will happen or not, if rate cut how
many percentage possible. So, lot of uncertainty leads to increase volatility once outcome comes the volatility reduces drastically.
B) Even if market go up or down the premium of put and call go down up to some extent. Generally
market panic put premium rose like rocket but during such event today bank
nifty fallen 400 point from high still
put premium doesn't go up much.
C) Due to many calendar player who actively taking
position in market by shorting near
expiry and long in next expiry, as on 4th April due to weekly expiry also rollover position from 4th to 11th
April reduce premium as such participate take position by placing market order
only.
Which strategy used for position?
One can initiate Strangle(https://www.derivativelearn.com/2019/02/strategy-8-long-strangle-and-short.html) or straddles(https://www.derivativelearn.com/2019/02/strategy-7-long-straddle-and-short.html) strategy during such event. It can give much
return in intraday only. By taking position on both side call and put selling
one can earn volatility benefit. Even Butterfly(https://www.derivativelearn.com/search?q=butterfly) also suited during
such period.
What trader should do in case of opposite move came ?
In case of today event if
anyone create position in bank nifty by selling call and put today morning and
policy time is 11:45 am, so one should keep SL of few things.....
Rate cut came 0.50%
Any cut in CRR
Any major decision announced
In such situation one should
immediately book loss and exit position. Or one can book partial position where
expected loss is going to be huge. Like rate cut 0.50% which lead bank nifty to
go up trader should immediately cut call position and book loss.
Any one done Straddle in bank nifty option
@ 30300 Strike in the morning in 11 April and 25 April net pay off it be like
this.....
Expiry 11 April, 2019
|
||||
Premium close
|
||||
Type
|
Strike
|
23-Apr
|
24-Apr
|
|
Call
|
30300
|
305
|
149.4
|
155.6
|
Put
|
30300
|
344
|
376
|
-32
|
Net Gain
|
123.6
|
|||
Expiry 25 April, 2019
|
||||
Premium close
|
||||
Type
|
Strike
|
23-Apr
|
24-Apr
|
|
Call
|
30300
|
561.5
|
429.35
|
132.15
|
Put
|
30300
|
544.3
|
540
|
4.3
|
Net Gain
|
136.45
|
|||
Bank nifty volatility index was trading at 18.5 before policy announced at day close index came to 16.5. It shows implied
volatility reduce by 11% in single day
which directly lead to reduction in option premium. In other words vega of
particular option strike reduce by 2.5*Vega value (i.e. 28 rs in 25th April) so
70 rs. In call option and 70 rs. In put option reduce from previous close.
For weekly expiry implied volatility
reduce by 4* Vega value (i.e 16rs) so, 4*16 for call and put both comes around
128 rs
Happy Reading
Derivative learn
Derivative learn
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