Nifty rose 7% in November series: Here are the ‘don'ts’ of post expiry trading

With the September quarter earnings season at its fag-end, Moneycontrol analysed the BSE companies for their profit margin performance. There are 9 companies in the BSE universe whose profit margin increased consistently in the last four quarters. The increase in the last two quarters has been despite the disruption created by the widespread coronavirus and the resultant lockdown. We considered only companies with a market-cap of over Rs 500 crore. Interestingly, 4 out of these 9 companies have gained between 100 and 350 percent in the FY21 far. Interestingly, not a single company has given price growth below 35 percent in the same time period (Data Source: ACE Equity).

Shubham Agarwal

We have been discussing what to do to shape our trades for a better economic worth out of the expected moves. Today, we will discuss what not to.

Well as a monthly event for most of the underlying stocks & indices, Expiry changes a lot of equations and is capable of a momentary upsetting a well-established order. We will raise caveats four possible distortions in the aftermath of an expiry day.

The Nifty50 rose 7 percent in the November series, the biggest gain in a derivative series in over two years.

Expiry of futures and options (F&O) contracts do have implications of 2 sets of participants. One being the directional participants who would be evaluating whether or not their view would carry forward and others being the non-directional set of participants who would be evaluating certain price equations between instruments quoted for the next expiry.

Related stories

Shubham Agarwal

CEO and Head of Research|Quantsapp Private Limited

• 
  Identify potential turning points with advance-decline: Shubham Agarwal
• 
  Slow and spreads more efficient: Shubham Agarwal
• 
  Use implied volatility as probable top finder: Shubham Agarwal

Now either one of these sets would unwind their positions or carry it forward. While carry forward may not have so much of impact on the underlying, the unwinding may create a lot of noise which the underlying does not deserve.

Governed by such volatility when the expiry ends, we shall be watchful of more common pitfalls. I have been taught 4 such lesions by the F&O market, which I would like to share.

#1 Avoid Leverage in the last hour of expiry

The unwinding pressure that we talked about is much more impactful on prices in the last hour of trade on the day of expiry. Hence, the prices may be unduly pressurized or inflated and the same would normalize in the next few sessions.

Hence, avoid taking any leverage in the last hour of trade. If at all any such anomaly looks intriguing, resort to options and move to a leveraged trade in futures after the dust settles.

#2 Huge Additions & Big Price Action pockets

More often than not we do get lured by the ongoing winners with a hope to see it continue. However, I have been bitten by a few of these well-known winners.

What ends up happening is that the price at which we would get in might just mark an intermediate turning point against us.

Since then, as a rule, I practice and recommend to stay away from the stocks and sectors which have seen a large addition in Open Interest expiry over expiry and has already seen a big move.

Either avoid completely or wait for further additions and or a pull back to enter. Not a good set for early expiry trade.

#3 Trading Unwinding

Short Unwinding has a relatively higher and swifter impact on the prices and might push us to believe that a reversal is in place. This could be visible more in the last week or even on the last day of November expiry.

The same move could actually just be led by unwinding pressure and could very well turn into business as usual on the very next day of expiry.

Stay away from the stocks that have been taking an opposite course of price action in the last week of expiry. Awaiting fresh addition in the favor of that reversal has always cost me a few percentages but has saved me off of many big disasters.

#4 Avoid Selling Options in Ratios

Although, we have talked about how non-linear time value element makes it unattractive to create a trade with one long Option and multiple Short options (no matter how far) against it.

It is my moral responsibility to reaffirm here that certain stocks may actually be in expiry led disruption, in such situation the very next sessions of expiry may bring in a Swift Price action, ruining the directional forecast by turning the trade into losses arising out of additional options short, despite the view being right.

Finally, the objective here is not to discourage from taking a trade but to know that there is a possible pitfall and be vigilant.

Disclaimer: The author is CEO & Head of Research at Quantsapp Private Limited. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.