Just two days after the Closing Auction System (CAS) was introduced, traders are rethinking their strategies due to sudden premium spikes and higher implied volatility (IV). The most affected group are those trading zero‑day‑to‑expiry (0DTE) options.
During the last 40 minutes of trading, option premiums surged and IV rose sharply. The benchmark Nifty 50 index showed large swings during the auction, making it hard to predict the final settlement level.
Because the auction starts after continuous trading ends at 3:15 pm, options traders cannot hedge their positions once the auction begins. This makes 0DTE contracts riskier than before.
Sudeep Shah, Head of Technical and Derivatives Research at SBI Securities, warned: "Option traders should avoid selling out‑of‑the‑money (OTM) options and carrying them into expiration for the next few sessions." He added that liquidity may stay thin around expiry until the new system stabilises.
The problem stems from how the closing auction works. Cash market trades stop at 3:15 pm, then all orders are pooled to find an equilibrium price. Derivatives trading, however, continues, creating a disconnect.
On Tuesday, Nifty traded near 24,450 before the auction but settled at 24,615 after the auction. Nifty futures did not reflect this move, leaving traders unsure where options would finally expire.
Normally, option premiums fall as expiry approaches—a phenomenon called theta decay. On August 4, IV on OTM strikes climbed instead of falling. By 1 pm, IV had risen from about 10‑11 to nearly 14, and by the end of the session it reached 22‑23 on both sides.
An unnamed broker representative said, "These are levels we normally see during event risk, like the Union Budget." Even at‑the‑money straddles, which usually lose value quickly, held their premiums instead of melting.
A trader noted, "Unlike during continuous trading, traders have little opportunity to hedge or exit based on movements in the underlying cash market once the auction begins." The uncertainty over the final settlement made many reluctant to sell options.
Chandan Taparia, Head of Technical Research at Motilal Oswal Financial Services, observed that premiums usually decline around 2:45 pm, but this time they held firm till the auction because traders had seen the risk on the first CAS day.
Mitesh Dalal, Head of Broking at Sanctum Wealth, gave an example: "During the day, the 24,450 call option traded around Rs 55‑70, but Nifty settled at 24,614.90. Nobody expected that kind of move." He added that many option writers had squared off before 3:15 pm to avoid the unknown.
Taparia noted that participation from professional option writers dropped noticeably after seeing the mispricing the previous day. Traders preferred to stay out of positions rather than risk an unexpected settlement move.
Shah echoed this caution, advising traders not to carry aggressive derivative positions into expiry for the next few sessions.
Overall, the new CAS has introduced volatility and uncertainty for options traders, especially those dealing with 0DTE contracts. Traders are advised to monitor premiums and IV closely and adjust their strategies accordingly.