BankNifty – RBI Policy Week of 06Dec

This week of 06 December is the Fifth Bi-Monthly RBI Monetary Policy Statement for 2018-19. It is also the first since the face-off with the government happened in November. Media generated tussle or not, the issues of the RBI reserves were the forefront of the debate that hasn’t yet been resolved.

This puts this week’s RBI Policy statement squarely as the biggest event of the 06Dec week of BankNifty weekly option expiry. So let’s see how the options pricing has behaved coming into the week.

Implied Volatility – BankNifty 06 Dec Options

The Monday morning gap-up from the US-China trade deal news from the weekend G-20 brought on some calm into the markets and led to a cool off in the $INDIAVIX. However, both the $Nifty and $BankNifty were not able to hold onto the morning gains and sold off into the day. Expectedly, the 06 Dec options implied volatility rose from its values on Friday’s session. 

Comparison of Implied Volatility with short and medium term Historical Volatility – BankNifty

Realized volatility of the BankNifty continued to collapse along with the intraday and daily ATR values also collapsed to new lows.

Nothing exceptional was observed with the Option Open Interest analysis. The market continued to write calls more than puts in today’s session. 

Open Interest Data from Opstra – Definedge

Round figure strikes continued to be the highest points of open interest with the 26500pe and 27000CE holding on. 

With this setup in view, we’ve taken on our Hive of Flies trade for the RBI Policy Day on the $BankNifty. It involves buying and selling an equal number of options to keep the position risk defined. The current position benefits from a slight downtick in the BankNifty levels as well as theta decay. Volatility isn’t too much of a factor in this trade as it is initiated just 3 days from expiry. 

BankNifty 06Dec Hive of Flies with payoff on 05Dec – dotted line