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How To Safeguard Your Investments Amid Algorithm-driven Stop-loss Hunting On Expiry Day – News18

Curated By: Business Desk

Last Updated: November 20, 2023, 14:07 IST

Major traders are employing algorithms for stop-loss hunting.

In an initial assessment, the fluctuations were thought to be linked to low-margin requirements.

The swing trading and intraday have been facing setbacks. Over the last three months, notably on expiration days, larger market participants have impacted smaller traders. Stop-losses on both call and put sides are being triggered without significant movements in key indices such as Fin Nifty, Bank Nifty, Nifty and Sensex. This development is raising concerns among small traders, particularly as stop-losses are hit in out-of-the-money (OTM) options. Selling OTM options has become challenging, bringing challenges for traders navigating the market.

For individuals involved in stock market futures and options trading, the significance of this development is apparent.

In the context of OTM options, it’s crucial to understand that they expire as zero on the expiry day. Traders investing in long-term options (valued at Rs 2-4) often face capital losses, while those selling OTM options can secure profits. Although the profits from selling OTM options may not be substantial, they often lead to a profitable account closure.

For example, if Nifty is at Rs 19,700 today, the option with a strike price of Rs 19,700 is considered at-the-money (ATM). The option becomes out-of-the-money (OTM), explaining the rapid decline in OTM option prices, approaching zero by market close.

Concerns emerge as out-of-the-money (OTM) options exhibit notable price fluctuations without a corresponding movement in the index. Suspicions arise that certain individuals may be involved in market activities, posing a significant risk to small traders. Excessive fluctuations in OTM option prices, without corresponding index movements, have the potential to trigger stop losses for small traders engaged in selling options with narrow profit margins.

In an initial assessment, the fluctuations were thought to be linked to low-margin requirements. But as this pattern continues, suspicions point in a different direction. Major traders are employing algorithms for stop-loss hunting. This practice involves large institutions or algorithmic traders using techniques to trigger stop-loss orders, resulting in losses for smaller traders. In this scenario, significant players stand to benefit.

In derivatives trading on the stock market, there’s no foolproof strategy to completely avoid losses. Still for those involved in derivatives, futures, and options trading, adopting protective measures is crucial. Trading with hedging strategies, offering various techniques to mitigate potential losses, albeit with a corresponding reduction in potential profits should be given utmost significance.

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