Abrupt spikes in Midcap's put options on expiry wipe out traders' capital

Market participants say that this is more frequent in the less-liquid options of Sensex and Mid-cap Nifty, though there have been instances in Finnifty as well

On April 8, the price of Midcap Nifty 10,800 put options surged from Rs 0.850 to approximately Rs 150 in just 3 minutes, occurring between 1:30 and 2:30 noon. This spike was triggered by sharp weakness in the index, leading to frantic exits by put call writers and subsequent short-covering rally.

The Midcap Select Index at 13:15 plummeted from its high of 10,929 to a low of 10,695, marking a significant 2.14 percent decline.

There have been spikes also seen in call options in Midcap Nifty today at around noon, which was followed by spikes seen in put options.

The rush to exit positions fueled the spike, resulting in heightened exit-related slippage 

A derivative trader told Moneycontrol, "Today’s spike in Midcap put options was driven by low liquidity, thus exacerbating the situation. The spike was triggered by significant demand for put options and subsequent short covering, causing a remarkable jump from a mere 1 Rupee to Rs 150 per option, creating challenges for traders trying to exit their positions."

"The rush to exit further fueled the spike, resulting in heightened exit-related slippage. Despite typically maintaining a 1 percent stop loss, traders like myself saw losses of 5-8 percent due to these slippages. Such spikes in Midcaps, often attributed to low liquidity, may stem from manipulation, fat finger errors, or proprietary desk activities. The Midcap expiry market, thus, remains highly susceptible to such manipulative forces, " he added.

Why is it happening? 

Chintan Singh Jaggi from Algotest.in explained, "Newer indices like Midcap have lower liquidity, meaning even moderate selling pressure may not be readily absorbed. This can lead to significant temporary dislocations like we witnessed today. In contrast, established indices like NIFTY and BANKNIFTY managed to absorb the selling pressure with less market impact, dropping only around 0.4 percent. However, MIDCAP Select index saw a more than 2 percent decline."

Chintan also noted that many traders faced significant losses today because their stop losses were skipped due to the lack of liquidity in the options market.

He emphasised that he only engages in risk-defined trades in MIDCAP, such as iron condors, as stop losses can be easily triggered by such volatile move.

Advise to traders

Sarang Sood, a derivative trader, commented on today's expiry on X, advising traders, "Not trading, especially option selling, in less liquid expiries is a crucial risk management step one can take. That means one is ready to forgo that illusive theta, so that one can protect their capital. You never know what these expiries are capable of. Capital preservation should be first priority."

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