Last week of April it was observed that BNF was going up but option prices even near OTM just 600 points away from ATM were not going up, infact they were falling
Finally on Wednesday Option prices spiked all the way upto 3000 points away from ATM.
Why CE option prices did not go up in the first two days of market run up and why did they shoot up only on the third day of run up? On digging further and looking through the charts I got the answer
Gap up but no follow up
26-Apr BNF opened with a huge gap up but for the rest of the day kept on sliding downwards slowly. So there was no premium build up after initial jump early morning
Trend up day but no gap up
On 27-Apr market opened flat, so option premiums decayed at market open. Rest of the day market slowly grinded up and option premiums just barely recovered the premium decay that happened at market open.
Gap up + brkouts = gamma explosion
On 28-Apr, market opened with a gap up and then gave a breakout mid-day. This combination lead to huge spike in option premiums. First prices spiked with gap up in the morning. CE writers got into trouble. Then mid-day breakout lead to panic for CE writers. This triggered huge short covering and option prices kept going up whole day. This combination of gap up + breakout contributed to gamma explosion.
Handling gamma explosion
Once gamma explosion triggers, option premiums spike like crazy. This is trouble and panic situation for option writers. Good opportunity for option buyers. Also this can be good opportunity for far OTM option writing with high premiums although continued momentum can be very risky.
Predicting Gamma Explosions
Look at previous gamma explosion on PE and CE side 1000 points away from ATM. Those are key levels below which PE should be exited and above which CE should be exited. As shown in the chart below, high of the red candle that caused PE gamma explosion must be the level to be noted for this, which will give some buffer time to exit before the next gamma explosion
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