01Cold open: it is not the volume, it is one way flow
It is not the volume. It is one way flow. Three days, three tests, and yesterday finished the argument. Yesterday was the Sensex expiry, the busiest, most crowded session of the week. And on that day the closing auction session mispriced one stock out of 210 by more than 2 percent. The stocks that are not in the auction managed 72 out of 1,955. The auction was seven times better than the rest of the market on the heaviest day of the week. So it is not the size that breaks it.
02The three tests side by side
31st August, the MSCI rebalance, 44 of 210 mispriced by more than 2 percent, four times worse than everything else. 2nd September, an ordinary Wednesday, three of 210, three times better. 3rd September, the Sensex expiry, one of 210, seven times better. Expiry has enormous volume and the auction ate it without blinking. What broke it in August was not the volume. It was flow with one direction, one head, one deadline and a name list of stocks. Passive money has to buy, has to buy those exact names, and has to be finished by the close. That is what the auction cannot absorb. The auction handles volume. It does not handle one way flow. That is the whole arc, and it took three days and a control group to get there.
03The print did it again, the other way
The Nifty's low yesterday was 23,873 and its close was 23,873. The low was equal to the cash closing. The Sensex low was 76,152 and the close was 76,152. The Bankex, the same. Three indices printed the day's low as the close, two sessions after they printed the high as the close. So the charts are completely messed up and the closing prices are completely messed up. The Sensex indicative at 15:20 flashed 74,373 and it settled 76,152. That is a 1,780 point swing in less than eight minutes. The same thing happened on 27th August, the indicative was 75,098 against a settlement of 76,933. Third time on record. The Sensex was 76,551 at 3:13 and printed 76,152, so the auction took out 400 points. The Nifty window was quiet by comparison, about 58 points against the 117 and the 128 of the two days before.
EP118 in 7 topics
04The receipt: defined risk priced in advance
So yesterday I gave you an iron fly. Sell the 76,700 call and put, buy the 76,400 put and the 77,000 call. The credit was 237. And around 3 pm the same was trading around 170. So the wings cost 212 and saved 34 on the day. That is the defined risk I am talking about. The tape yesterday: the Nifty was down 41 points, minus 0.17 percent, the Sensex down 417 points, minus 0.55 percent, IT minus 1 percent. India VIX slipped again and is still under 12. Cash turnover was 1 lakh 7,700 crore from 1 lakh 12,965 crore, so the cash volume is still going down every day.
05A rotation, not a rally
The index did nothing and everything below it went up. The Nifty 500 printed 307 advances against 190 declines, and the total market 460 against 285, after four straight bad breadth sessions. That is a complete flip. Smallcap 50 up 1.24 percent with 37 up and 13 down, Smallcap 250 up 1.03 percent, Smallcap 500 up 0.9 percent, against the Nifty 50 at minus 0.17 with a breadth of 21 up and 29 down. Realty plus 2.58 percent, media plus 1.74, PSU banks plus 0.48, private banks plus 0.5, Nifty Bank plus 0.3. And IT was minus 0.85 percent. This is a rotation, not a rally. Money left the index and went down the cap curve.
06The board: the biggest one day call build of the run
Calls 2,032 lakh, puts 1,334 lakh, PCR 0.656, calls written at 2.1 times the pace of the puts. 24,000 took 96 lakh calls in one session and the total now stands at 1.83 crore. That is the biggest resistance we are going to face going ahead. Then 24,100 at 1.21 crore, 24,050 at 38 lakh, and 24,300 with around 29 lakh added. Support is at 23,500 with 1.05 crore, then 23,600 at 82 lakh, and 24,000 also has a decent buildup on the put side of around 74 lakh. Max pain sits at 23,950, almost 77 points above the spot, so for once the magnet is in front of us, not behind us. The gamma flip is at 23,900 and the spot is 27 points underneath. And the futures still will not follow the cash: the September contract closed at 24,000, the basis has gone 34 points, then 85, then 126 across three sessions, and the futures have closed at or above 24,000 twice while the cash sits 127 points below it.
Chapter 7 of 7, about 3:10 of the 12:42
07The plan: the real trade is not the index
Implied volatility is under 10 percent, the one day standard deviation is plus or minus 117 points, so 23,758 to 23,989. The 23,900 straddle is 214 over four days, about 134 points a day, so the band comes around 23,750 to 24,000. The pros flipped their call book net short again, a sixth flip in about 10 days, so it has no view at all. The FIIs added another 6,000 futures short to 2,35,102, another run high. And the crowd sold 89,000 more naked puts, taking that book to 8 lakh, the largest since the 8.44 lakh book that expired worthless on 26th August. Remember how that ended. On the flows the foreigners sold 2,346 crore of cash and the locals bought 4,977 crore, fully absorbing it, but the foreigners bought 7,186 crore of index options and 1,121 crore of stock futures. Still long the companies, short the index. So the plan: a gap up near 23,950 to 23,980, straight into 24,000, now the most defended strike on the board. Resistance 24,000, then 24,100, then 24,200. Support at 23,900 is building nicely. The real trade this week is not the index, it is smallcaps, defence, chemicals and energy. And the risk is that the crowd is short eight lakh puts, so the market would not break easily. Oil at 96 is also a concern, up 11 percent in eight sessions. Spreads only, stay light in the cash session, and do not carry anything extra after 3:50.
