Traders lose heavily as NSE benchmark falls below key level

ET INTELLIGENCE GROUP: Put writers who bet on Nifty staying above 8,000 lost heavily on Thursday after the index fell below the crucial mark. The traders are likely to have lost as much as Rs 40 per lot after their bet turned awry.

The 8,000 level had the maximum open interest position and many traders were confident that the index would not breach this level.

The cumulative open interest in the past six days was about 84 lakh shares and traders were continuing to write options despite low implied volatility.

A put option gives an investor the right to sell shares, while a call option gives the right to buy securities at a particular price on a particular future date.

If a put writer is writing an option which is trading with a lower IV it means that s/he believes the option will a very low chance of breaking the 8000 Nifty level.
This is the reason why s/he will initiate a trade despite receiving a lower premium.
The premium for Nifty 8000 put during the past five days oscillated between a low of Rs 4.85 on September 22 and a high of Rs 64.45 on September 19.

A put-writer who has initiated a trade during the past six trading days has lost substantial money as the call closed with a premium of Rs 88 on the expiry day.

The average put premium in the past five trading days was Rs 13.76.

But since the Nifty index closed below 8000 level, the put option incurred losses.