Traders bet on 800 point move in Bank Nifty on MPC outcome

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Traders bet on 800 point move in Bank Nifty on MPC outcome


Mumbai: Some retail-level traders have initiated a market-neutral strategy on Bank Nifty options, expecting a spike in volatility amid the RBI’s Monetary Policy Committee’s (MPC) decision on a benchmark lending rate on April 7.

The MPC decision comes in the wake of a surging second wave of Covid cases that threatens the country’s nascent economic recovery.

The traders will benefit only if the Bank Nifty moves in excess of 824 points above or below Tuesday’s spot closing near 32,500. That is it must break out of a 31,676-33,324 range on either side. This is called market or delta neutral strategy as it doesn’t depend on direction as much as large movement either way.

The traders have purchased a 32,500 call and put option for each of Bank Nifty options expiring on April 8. In market parlance, this is a long straddle. The underlying Bank Nifty index closed at 32,501.35. The combined cost of both the options is Rs 824 a share, with 50 shares comprising a combined lot, provisional data indicates.

“That’s expecting an over 2.5 per cent move either way during or after the rate announcement,” said Vikas Jain, senior analyst Reliance Securities. “While the traders have played it safe by insulating themselves against directional risk, it shows the index is in for a large move either way.”

Jain’s own bias is a downward one in case the index fails to sustain above 32,400.

The maximum loss for the trader is Rs 824 and happens if the Bank Nifty expires the weekly series at 32,500. The upper breakeven point above which the trader begins to gain is 33,324 and the lower breakeven point below which gains begin is 31,676.

Maharashtra and Delhi are two states which have announced partial lockdowns until April 30. Markets are speculating on a lockdown in Gujarat. If increasingly more states announce lockdowns, the market will get jittery, said Rohit Srivastava, founder of IndiaCharts, who terms potential mini lockdowns as “spoilers” to an anticipated upward movement.



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