Major miss in famous Zero to Hero options: Shubham Agarwal

Shubham Agarwal

We all know the Options premiums are directly related to time. Longer the duration, higher the premium and vice versa. Ideally for deal seekers, the day of expiry should be the best as with least time left for expiry the premiums are super cheap.

Majority of the times these moves come up during the last few hours of the trade. Here, there is an opportunity as well as a threat.

Let us understand the opportunity first and then try to look at the issue that could create one of the biggest misses. The opportunity is simple. Option premiums are directly related to the probability of option expiring in-the-money (ITM) (ITM = Call Strike below Expiry Level & Put Strike above Expiry Level).

Now, with limited time even a higher Call or 100 points lower put also has lower probability of expiring ITM. So, the premiums are very very low. However, with a sudden move of 50-70 points that probability becomes higher, the option premiums see a sudden jump.

Such jumps caused by last day moves means the Options get labelled as Zero to Hero.

In a perfect world scenario, this looks really encouraging but there is a systemic problem. Before that let us understand the system first. Exchange says upon expiry all the option contracts get settled at the closing price of the underlying stock/index.

Closing Price = Volume Weighed Average price of Underlying from 3pm – 3:30pm.

This creates a problem. Let us understand with a very simple example. We are taking a case of 10-Apr-24 expiry of Bank Nifty, which falls in the last half hour of trade. Let us say at 49,060 as seen in chart, we could identify the opportunity that it has more than 150 points downside from here before it closes for the day. As seen in the chart it does happen.

Now, looking at this possibility one goes ahead and creates a Buy Put trade. Weapon of choice is the next available Put strike of 49,000. As seen from the chart it was trading at around 4-5 at that point in time. We are expecting a fall of 150 points meaning the index should go down to 48,900 and there about.

It manages to go down to that level as well. However, to our misery look at where the Option Premium ends up at the end of the session. Just 13 from the level of 4 while the index goes down from the level to 49,060 to 48,912.

This is the biggest miss that we are talking about. While the index was going down in 100+ of points, the Close (Weighted Average) was not moving around so much because it was averaging very high price and very low price. As a result, we ended up with a close of 48,986. The Option was valued at the closing price at 13 ( 49000 (Put Strike) – 48986(Closing)).

Lesson to learn here is that if you want to trade Zero to Hero on expiry day, either avoid last half hour trade or trade with a target on weighted average and not Underlying. Weighted Average is a feature easily available on any charting application.

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