There
was a sudden spike of nifty 50 put option premium in the derivative market on
18th April expiry day. The sharp price rise was so furious that skipped many
stop losses where traders ended up to absorb unlimited losses trying to
get exit from their trades. The premium of an ATM (at the money) put option
spiked more than 10 times in minutes, as a result all option sellers incurred
huge capital losses to find an exit.
While such type of
option price movements are common in the market on expiry days since last
February. Actually, this type of sharp price movement is seen in less liquid
indexes and mid cap nifty, but it is unexpected in such a stable counter like
nifty 50.The put option premium of 22300 strike shot up to 250 from 39.50 in a
one minute candle, then to 392.25.
What
are the reasons behind this sudden surge in option's premium :
We can see such type of unexpected
spike in option due to gamma effect. Gamma is a Greek of option that measures
the change in Delta, another Greek of option, with respect to change in the
price of an underlying asset. Gamma=change in option Delta/per unit change in
an underlying asset. Gamma is the accelerator of Delta. It is the main enemy of
option writers or option sellers.The change in Delta value is due to the Gamma.
Gamma has maximum effects near ATM(At the money) options specially on expiry
days.
Another probable reason is the
congestion in the same contract in the same strike price. When a huge number of
option sellers trade at the same contract at the same strike and if their
pre-decided buying stop loss get hit, intensifying the premium price
rise, everyone then try to exit from the trade and consequently the price of
option premium shoots up sharply. Such sudden option premium movement is famous
as "injections" in social media.
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