FinNifty put options across various strikes from 20700 to 21400 saw an alarming surge on the afternoon of April 23 expiry day, climbing as much as 20 times in just one minute, whereas the underlying FinNifty index fell less than 50 points at the same time.
At 1:05 pm, the FinNifty 20900 put option spiked from Rs 0.5 to Rs 9; similarly 21000 PE jumped from Rs 0.95 to Rs 10, as seen in the 1-minute candles. Meanwhile, the FinNifty index saw a 40-point fall from 21353 to 21313.85 during the same 1-minute candle.
This is not an isolated incident; similar volatility was observed on April 18, when the premium of a Nifty 50 Put Option 22300 escalated from Rs 39.65 to Rs 250 nearly instantaneously.
Market analysts suggest that high-frequency trading (HFT) firms using algorithmic trading strategies might be behind these drastic movements.
Also Read: Expiry day swings in OTM options: Hunter algos may be triggering stop-losses
Derivatives trader Sarang Sood said that he believes that HFT players are manipulating the market. “Big market operators are leveraging substantial market exposure and executing basket orders in stocks to manipulate the index and consequently affect derivative players,” said Sood.
How are these trades executed?
Explaining the mechanics behind these price surges, Sood said, “They (HFT players) know at what price the stop losses are being placed and they are simply hunting them down. If they move the option 10 times in 5 seconds, it will easily trigger the stop loss.”
Anshul Jain, head of research at Lakshmishree Investments and Securities, also described the situation as a possible result of ‘stop-loss hunting’, exacerbated by low liquidity and the pressures of the weekly Nifty Finance expiry. “As traders scrambled to protect their positions amid the rapid downturn, the options market witnessed unprecedented activity,” said Jain.
What is the impact on traders?
Such price movements, which have come to be called injections, were more common in less liquid options of Sensex and mid-cap Nifty; but are now increasingly appearing in other indices like the FinNifty, reflecting a shift in market dynamics.
“For option traders, this is a scary situation as it can lead to huge capital losses in a matter of seconds,” said Sood.
Sood suggested revisiting option limit spike norms, which previously curbed such abrupt market behaviours. “Previously, there used to be a limit to option spikes which NSE removed in 2021,” he said. “For example, an option could only go up by Rs 20-30 rupees in seconds. Then if that happened, the option would freeze and then reopen. This would prevent such abnormal spikes on counters.”
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