Stock Market Manipulation Continues: How Retail Investors Are Facing Expiry Day Losses

Summary

The video discusses market manipulation and volatility on expiry days, particularly focusing on the influence of call and put options. Sajjit breaks down the day’s events, detailing call writing and put buying, as well as the impact of market shorts, which caused Nifty to fall. The conversation also touches on the effect of Jane Street's participation and the financialization of savings, especially with retail traders. The panel emphasizes how volatility and manipulation are longstanding market phenomena, with no significant changes post-COVID, and the challenges retail traders face in a highly financialized market.

Takeaways

• 😀 Expiry day market manipulation is a common occurrence, especially with respect to options premiums and calls being written.
• 😀 A clear pattern of call writing was observed before the expiry, with significant resistance around the 25,200 strike price.
• 😀 From 9:15 AM to 10:00 AM, call options were written at high premiums, while put options were bought at low premiums.
• 😀 After 2:15 PM, call options decayed towards zero as expected on expiry day, while put options saw a significant rise in premiums due to implied volatility.
• 😀 The Nifty index closed at 25,111 due to shorts created in IT stocks, causing a decline in the market.
• 😀 Put writers made substantial profits as the put premiums soared to 88.4 due to increased implied volatility from market manipulation.
• 😀 Despite Jane Street's known role in market activity, the data shows that retail traders also suffered significant losses in derivatives trading.
• 😀 Jane Street’s profit over the last two years is a small fraction (12%) of the total losses made by retail traders in the last four years.
• 😀 The impact of Jane Street and other participants, like HNIs, on market volatility has increased in recent weeks, particularly after their regulatory changes.
• 😀 The rise in retail participation in derivatives has contributed to increased volatility and market manipulation, with daily volume surging from 1 lakh crores to 400 lakh crores since 2018.
• 😀 The professional market has long been accustomed to strategies like strangle trades, but the rise of retail traders has exposed them to manipulation risks, creating an uneven playing field.

Q & A

What is the primary focus of the discussion in the transcript?

The primary focus is the analysis of market manipulation on expiry day in the derivatives market, particularly in relation to call and put writing activities and their impact on the Nifty index.

How does the conversation describe market manipulation on expiry day?

Market manipulation on expiry day is discussed in terms of call and put writing, with emphasis on how certain players, possibly including Jane Street, manipulate the options market. This involves writing call options and buying puts at specific moments to influence premium values and market movements.

What are the three components of the analysis provided by Sajjit?

Sajjit breaks down the analysis into three components: 1) Pre-expiry activity, where call writing is observed; 2) Activity between 9:15 AM and 10:00 AM, which focuses on the call-writing and put-buying dynamics; and 3) Post-2:15 PM, where calls decay to zero and puts see a significant rise in premium.

What was the impact of the events after 2:15 PM on the Nifty and the options premiums?

After 2:15 PM, call options decayed significantly towards zero as expected on expiry day. However, put options saw a sharp increase in premiums, rising to as high as 96 rupees, largely due to shorts created in the market, especially in IT stocks, causing implied volatility to spike.

What is the significance of the 25,200 strike price mentioned in the analysis?

The 25,200 strike price is highlighted as the 'at the money' strike with the highest open interest, which served as a key resistance point for the market. It was pivotal in understanding the manipulation of the options market as call writing was heavily focused around this strike price.

How does Kush describe the impact of Jane Street's activities on the market?

Kush explains that Jane Street's impact is evident through changes in implied volatility, particularly in 'at the money' options, where volatility has decreased over time. He suggests that while Jane Street's influence is noticeable, it is not the sole factor behind market movements, pointing to broader market forces at play.

How do market participants traditionally handle expiry day volatility?

According to Kush, expiry day volatility is a common and well-understood phenomenon among traders. In fact, traders often use strategies like strangle trades, where they buy both calls and puts, to capitalize on large market moves expected around expiry.

What does Kush mean by comparing retail traders' participation to Tyson fighting with his hands tied?

Kush uses the metaphor of Tyson fighting with his hands tied to illustrate the disadvantage retail traders face in the derivatives market. With the rise of retail participation and increased volumes, individual traders are at a structural disadvantage against larger institutional players who have more resources and expertise.

What statistical data does Kush provide to show the impact of retail participation in the derivatives market?

Kush provides data showing a dramatic increase in retail participation in derivatives, rising from 2% to 41% from 2018 to the present. He also highlights the increase in daily volume from 1 lakh crore to 400 lakh crore, emphasizing the massive shift in market dynamics due to the rise of retail traders.

What is the broader implication of the rise in retail trading in the derivatives market?

The rise in retail trading in the derivatives market reflects the financialization of savings, where individual investors are increasingly participating in complex financial instruments. However, this also exposes them to significant risks, as they are competing against more sophisticated institutional players, which could lead to substantial losses, as seen in past years.