BIGGEST FREAK TRADE in Bank Nifty Options

By | September 4, 2021 12:17 pm

Traders Spooked as Friday Freak Trade Streak Continues on Derivaives segment in  Nifty Futures /Nifty Options and Bank Nifty Options.

This is the sixth such incident in the last two months.

  • On 5th July, Nifty Futures surged 805 points or over 5%, without any similar rise in the underlying cash market.

  • 28th July, Nifty futures for August expiry crashed 5% or over 531 points to a low of 15,256 from its opening 15,787.

  • Bank Nifty index (37000) strike price rose by 2000 per cent from a low of ₹1 to touch a high of ₹2,040.

  • Nifty (16450 strike price) for August expiry rose by 800 per cent from ₹100- ₹800. around 2.18pm, suddenly there was a freak trade whereby 16,450 call options which was trading at Rs80 suddenly traded at Rs800 that too with a huge volume of over six lakh quantity within a minute. 

  • Bank Nifty 37100 PE went to 1921 in matter of Seconds with more than 2 lakh contracts traded at 1921 which looks like day light robbery. 

Below are the screenshots of Loss Taken by Traders as msot of them are having small trading account many traders blow off there account without any mistake of them.

During all these incidents of freak trades, the reversal to normal happened within a few seconds. All this happened within a minute and this was not even recorded on the charts; so when they went back and checked the charts, the candle had not even reached Rs200 levels leaving traders totally perplexed. The stop-losses could have triggered a domino effect. This freak trade made retail investors lose a lot of money; many have lost over Rs10 lakh.

This happened majorly due to the removal of TER(Trade Execution Range) mechanism by NSE on 16th Aug’21.

On 31st July, NSE came out with a circular saying that, with effect from 16th August, there won’t be any trade execution range. Thus, from 16th August, no equity derivative contract will have any upper circuit or lower circuit—so even though it is there, it is not actually valid which means options can get traded at any price. 

What is TER

As the name implies, TER is the price range between which option contracts could trade. The price range is set by the exchange as a risk management measure to ensure that no market order gets executed when prices go beyond this range.

For example, if a NIFTY call option is trading at Rs. 300, then no market order will be executed beyond 40% of this price on both sides. That means the TER for this call option will be [180, 420].But this used to lead in Option Price Freez during voaltile move and lead to option wirters unable to exit positions and take a loss.

WHY WAS THIS REMOVED BY THE EXCHANGE?

This risk management mechanism brought a new problem. Since, the range is set by the exchange manually, any large move in that particular option during the day or even during the market opening meant that the option could not be traded till the exchange manually changes the range again.

This is a difficult situation for a trader because of the inability to enter or exit a trade. The exchanges received a lot of complaints regarding the same and thus decided to completely remove this mechanism.

How to Aviod this kind of Incidents going forward

  • Always Stop-loss Limit Orders instead of Stop-loss Market Orders

If you have placed stoploss orders, freak trades on the exchange can trigger your pending stoploss orders. So if you had SOLD an Index call option at Rs 300  and stoploss at Rs400 , a freak trade at Rs800 would trigger your stoploss order; there is no way to avoid triggering a stoploss order due to a freak trade.

  •  Do not put SL i you can see the screen continueously and are disciplined trader

Trading is not a get easy rich profession. There are so many things that are not in our control. What we as traders can do is to manage our risks better because that’s the only thing that we can control.

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