Brief about Freak Trades and a Technique to make Money out of it by SolivagantYG
Recently we were and still are being hit upon by the issue of freak trades in the Indian Stock Markets, especially options trading where stop-losses of Option Sellers and Targets of Option buyers were getting hit and an option of a normal amount suddenly hitting highs of absurd values, and which had even led NSE to discontinue the SL-M orders Before getting into freak trades, I will briefly explain about Stoploss Market (SL-M) and Stoploss Limit (SL-L) orders SL-M orders is a kind of Stoploss order which gets triggered on a particular order value and Sells/Buys the existing position for the next available price For eg:- i. If you bought an option costing 100/- and thought of having your stop loss at 90/-, but you were not sure if the price would reach 90 or just jump from 91 to 89 which would leave your Stoploss Untriggered, thus you put an SL-M order directing your broker to sell your position for next available price if the price goes below 90/-, for suppose if the price jumps from 91 to 89 then your order would be immediately executed for next available market price below 90/- ie: 89/- ii. Similarly, if you had shorted an option for 100 and put an SL-M of 110, and if in case of price directly jumped from 109 to 111 then your order gets triggered and gets executed at 111 (which is the next available price to your trigger value of 110) SL-L orders is a kind of Stoploss order which gets triggered only at a price specified irrespective of market price For e.g.: - i. Suppose in the same example above you had an SL-L of 90/- that means you are directing your broker to sell your option at a price of 90/- if the price jumps from 91 to 89 then your sell order would be placed for 90/- and would get executed only if price touches 90 until then it would remain pending ii. Similarly in case of a sell order if you had sold an option costing 100 with SL-L of 110, then your order would get executed at 110 only neither less nor more Difference between SL-L and SL-M and which is better out of the two: - SL-M is advantageous in case of swift movements in price and would cause only a maximum difference of 1/- in most of the cases between your trigger price and executed price SL-L could prove to be fatal in some cases where the price in options just jumps 10-20/-, If you are a trader, you would obviously not risk 10-20/- for 1/-, thus most traders use SL-M Having understood simple definitions of kind of orders let us now jump into the topic!23:00
Brief about Freak Trades: - This is a simple explanation, This could be gamed by operators, or may not be it's secondary, we are here to understand what freak trades actually are and how to make money out of them So, in simple terms, freak trade means a series of trades getting executed with all the stop losses of option sellers and Targets of option buyers getting hit one by one in a series until price reaches the absurd value For e.g.: - Case 1: - An option seller sold an option for 100 and had an SLM of 110, similarly another option seller sold an option for 101 and had an SLM for 111, in another case a person sold the same option for 102 and had an SLM of 112 and so on, In the above case imagine if there are stop-loss market orders remaining untriggered from 111 to 900/- one by one, Case 2: - An option buyer bought many lots of the same option for 100 and had set up absurd targets over and above upper circuit limits (which NSE had explicitly removed by a notification circular a few days before freak trades started happening) from 110-900, Here starts the real streak, what happens is the price when hits 110 it hits the target of buyer and stop loss of seller gets triggered at 111 since the price has reached 110 which was his trigger value in next order stop-loss of 2nd seller gets hit at 112 and target of 2nd buyer hits at 113 similarly so on if the price reaches until an already overpriced value for suppose if at 300 there is a target price of the buyer and next sell order is only at 320 and at the same value of 300 there is SLM of the seller since next sell order is only at 320 In simple words, If a single stop-loss order of 111 gets triggered it will drive the price to 112 and this will trigger 2nd stop loss order of 112 moving prices to 113, which will trigger 3rd stop loss of 113 driving price to 114, and so on until it hits some absurd value ie:- 900-1000 Please refer to YT videos explaining options and freak trades if you need in a detailed analysis of how freak trades happen and the reason behind them, lets get to the most exciting part of the article How to make money out of Fake Trades, Well, everything is an opportunity in the stock market so are freak trades for traders to make money, Firstly, we choose the most liquid strike of an option mostly ATM or ITM since they are the most liquid and occurrence of Freak Trades, - Eg:- If Bank-Nifty is at 38000 then choose strike price of 38000 or below for Call Side and 38000 and above for Put side - Let’s assume I am expecting a freak trade to happen in 38000 CE of Bank-Nifty (Pure guess) Secondly, you buy and an OTM option for margin requirement by Broker to short options - In our example, you select an OTM that is 38500 CE which could be appx 80/- Thirdly, you put a selling order of the option at absurd prices that you are expecting freak trade to happen in, - In our example, you put a selling order of 38000 CE option at some absurd value of say 800/- Putting it all together, When you are having a selling order for 38000 CE option at 800/- (which is trading at around 250/-) this selling order is hedged with a 38500 CE option that you had already bought for 80/-, If at all a freak trade is likely to happen and if an option makes a high of 900/- which happens in most of the freak trades, your sell order for 800/- will get executed and the option will get back to its ordinary price, in milliseconds you will be gaining more than 550 points per lot, and if freak trade doesn’t happen then all you have to lose is the premium that has eroded on 38500 CE max of 50 points, an RR of 1:11 with almost less probability worth taking a try :P Ps: This could also serve as a good lesson to operators, if at all if it’s happening because of their practices as claimed by many Pls, contact me on @SolivagantYG on telegram for any doubts.