Early options data suggests traders do not expect market to go up until elections

But before that, a small refresher course on options. A buyer of a put option of strike price 5,000 suggests that some traders believe that market can go down to 5,000 anytime between now and June 27, 2019. These traders will make money if the expiry closes below 5,000 or if the value of put increases if there is a sharp decline in market and volatility increases.

Similarly, a buyer of call option of strike price above 14,000 would make money if Nifty crosses above 14,000 on or before June 27, 2019, or if the Nifty shoots up sharply and volatility increases taking the price of out-of-the-money options higher.

A call option gives the buyer of the instrument the right but not the obligation to buy a security at a particular (strike) price at a future date. A put option gives the buyer the right but not the obligation to sell a security at a particular price at a future date.

Open interest in the option chain suggests the strike price at which trades have transacted and are keeping their position open.

The highest open interest as on December 31, 2018, in the June 27, 2019 series is seen at the 9,000 strike price on the put side with an open position of 916,725. On the call side, the highest open interest is at 11,000, which is closer to the current market price.

The build-up on the put side indicates traders are expecting the market to go lower. The 9,000 June 27, 2019 put option is changing hands at a price of Rs 68 -- this is way above the theoretical price of around Rs 4.

Since there is not much activity on the call side on out-of-the-money (OTM) options one can say that not many traders are expecting the market to move higher in the next six months.

However, there is a huge buildup at the 5,000 call option. Price of the option is Rs 5,680 and the open interest is 12.29 lakh shares. This position has more to do with arbitrage than any directional bet.

This is because the price of Rs 5,680 is not only below the theoretical price of Rs 6,109 but also below its intrinsic value of Rs 5862 (Market Price - Strike Price). The traders who have built up the 5,000 call position have placed the bet to capitalize on the mispricing.

While it is still too early to take bets on the elections as volatility is bound to increase as we near the election day, some shrewd traders are taking advantage of mispricing and placing their bets. The big betting will start when the May 2019 series opens up and traders start taking a position.