On Thursday, a Bankex 65,000 Put option, expiring that day, experienced an astonishing surge of nearly 14,700% to 16,500% within minutes during the Closing Auction Session (CAS) on the BSE. The option jumped from roughly $6.65 to $987, catching many traders off guard. This extreme volatility was attributed to the newly implemented CAS mechanism, which aims to discover closing prices but can lead to sharp movements, especially when liquidity is thin.
The volatility was exacerbated by the Sensex's indicative closing levels during the auction, which briefly suggested a near 3% decline, much steeper than its pre-auction fall of 0.3-0.4%. This sharp drop in indicative levels triggered panic among derivatives traders, leading to stop-loss orders and increased market turbulence. Other Bankex put options around the 65,000 strike also saw premiums jump between 500% and 4,500%, resulting in significant losses for many options sellers, as widely discussed on social media.
At the market close, the Sensex fell by 0.70% to 76,933.59 points, and the Bankex dropped 1.67% to 64,313.15 points. In contrast, the NSE's comparable indices, the Nifty and Bank Nifty, experienced much smaller declines, closing down 0.48% and 0.47% respectively. The disparity in movements highlights the impact of the CAS on BSE-listed derivatives. The incident underscores the risks for expiry-day traders, particularly options sellers, when unexpected volatility hits during the closing auction, potentially leading to substantial financial impacts.
The event also highlighted concerns regarding India's Securities Lending and Borrowing (SLB) mechanism, which is criticized for its lack of depth and liquidity, making it difficult for market makers to efficiently short-sell and counter sudden price spikes. Exchanges have begun to implement countermeasures, such as providing real-time indicative benchmark pricing during the CAS window and introducing shorter-tenor SLB contracts to improve market functioning and transparency.
