CAS, it's implications and IV frenzy
So, after the introduction of CAS, I noticed that it did not affect Futures or the Options.
But on 4th August, something happened, Premiums did not have any extrinsic value, so when spot jumped by 100pts, so did the option. A 14 rupees option became 114.
On 5th August, nothing happened. So I was waiting for the Sensex expiry.
And today was wild and interesting.
My personal setup told me that calls will go crazy.
And then by today, I knew that calls will have a blast.
But majority of the people knew about the effect of CAS, hence the straddle value did not decrease, people kept buying options and straddle. IV and price was inflated because of the CAS tail risk.
So, the only thing left was to wait for the cash markets to close like it did on 4th August and wait for the premiums to react to the spot AFTER the CAS. But funny enough, the IV frenzy took place before CAS and everything was done and dusted before the CAS final value settlement.
Implications: Well, I was eager and excited because if CAS reacted like it did on 4th, hero zero became much better and easier. But the market or the big players factored it in. And the straddle didn't decrease. So anyone looking for cheaps OTMS to buy will have a tough time if CAS reacts like it did today. Straddle sellers will still have a problem with the spikes because of the one sided spike. Plus small sellers will have to close their trades before this frenzy, and that wouldn't bring them much profit.
Who benefits? People who are right about the direction and have a algo level timing. Or the big institutions that can sell straddle without worrying about the spikes. So basically, CAS is gonna benefit the big player because they can keep selling inflated premiums and milk more than usual. They can take the position of small sellers closing their trades. And with no time to react to the whiplash, it's gonna be brutal.
But then again, this is based on two expiries. Market factored it in after the first expiry. And now it might factor it in after the second expiry. Anyhow, we'll have to wait and watch. The implications are interesting, funny and weird.