Options writers make huge losses on freak spikes in indices

Options writers were caught o¢ guard by freak movements in the underlying indices last month, resulting in losses running into hundreds of crores for large individual traders, said two people in the know of things.

The options strike prices saw unusual spikes on at least three days, all within a few micro-seconds, triggering widespread stop losses and trapping traders looking for an exit.

Such spikes have spooked many wealthy individual option writers who stopped trading or reevaluating strategies. The buzz on the street is some large high frequency traders (HFT) may be responsible for the sudden spikes.

On April 12, the at-themoney options price for Sensex, for instance, surged from ₹116 to ₹750 within a few seconds, resulting in signi cant losses, especially at the 74,700 PE (put options).

The spikes seen in April resulted in losses of 7-10% for those who had not hedged positions

Momentary spikes

Devarsh Vakil, Deputy Head of Retail Research, HDFC Securities, said such momentary spikes in prices have also been seen in Nifty Financial Services.

“Prices come back to normal, but the stop-loss orders get triggered resulting in options writers losing a lot of money.

“Nifty Financial Services and Sensex are more vulnerable because they are relatively newer entrants in the derivatives space and have thin volumes in some strike prices,” he said.

To be clear, spikes in options strike prices have been seen in some shape or form since 2021, when retail volumes started to pick up. The spikes, however, were smaller and correlated with the index and could result in losses of 3-4% for those leveraged and 1-1.5% for those who were not.

But the spikes have shot up in the past few months after the onset of zero-dated options trading, where every day is an expiry. The spikes seen in April resulted in losses of 7-10% for those who had not hedged their positions.

Counter trades

“The movement in Sensex options on April 12 is peculiar because while the options prices spiked, Sensex Spot didn’t move at all. And then, it took almost three minutes for the spot and options prices to converge,” said an options trader. An email sent to the exchanges did not get an immediate response.

Experts blame the unusual activity on possible counter trades placed by HFTs.

“If it happened just once, it could be attributed to crowded trades or strategies or some noise in the market. But a regular occurrence indicates there is some alpha in the market that has been able to exploit options writers’ positions,” said the options trader.

(The writer is with The Hindu businessline)