Option writers at the receiving end as ‘zero hero’ expiry trade causes havoc

Nifty candlestick formation indicates a price-engulfing scenario, hinting at further upside in the coming sessions.

Sudden movements in options, especially in the last hour of trade on expiry days, are making life difficult for option writers. Going forward, as markets are likely to turn more volatile, such movements are only likely to increase, warranting extreme caution from option writers, several traders Moneycontrol spoke to said.

The NSE Nifty 50 gained nearly 340 points in the last hour of trading on May 16, after significant volatility throughout the day and dropping to an intraday low of 22,055. It closed at its highest level in the past eight days, gaining nearly 1 percent and finishing above the 20-day EMA at 22,304.

Option writers were caught off guard as Nifty saw a Rs 150 upswing in in-the-money calls, which were expected to expire worthless, triggering stop losses. Meanwhile, call option buyers profited significantly from the popular "hero zero" trades on expiry day. The zero-to-hero option trading strategy focuses on capitalizing on sudden price movements that occur near options’ expiration.

Avdhut Bagkar, Derivative and Technical Analyst at Stoxbox, said, “Going ahead, such volatility may occur frequently in the next few sessions, catching options players off guard, especially option writers. The bias firmly demands options players to remain calm ahead of the 2024 Lok Sabha Elections.” Bagkar also noted that the technical charts indicate a candlestick formation, which supports a positive bias.

While the big U-turn on May 15 was attributed to strong global cues after favorable CPI data the previous day, the Nifty had a dull day overall and only perked up in the last hour of trade. Siddhartha Khemka, Head of Retail Research at Motilal Oswal Financial Services Ltd, said the move was caused by “short covering on Nifty weekly expiry.” Bagkar seconds that view, adding, “The significant surge in the call option of 22,250 from a low of 1.30 to a high of 150 within minutes suggests that bulls are assertively taking the reins. Yesterday’s move endorses the positive bias observed earlier in the week.”

Ruchit Jain, Lead Research at 5Paisa.com, also said that market sentiment is shifting back to buying on dips. "Traders should take a buy-on-dip approach and look to buy on intraday dips. The overall market breadth is healthy, and thus, one should focus on stock-specific momentum," said Jain.
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