InvestorQ : Can you tell me about the fat finger trade that took place in the call options on Friday and what was the impact?
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Can you tell me about the fat finger trade that took place in the call options on Friday and what was the impact?

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Juvina Maggie answered.
7 months ago
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The big highlight of trading on Thursday was the freak trade in the options market, way off the market relevant price. For instance, a large quantity of call options of 14,500 strike were exchanged at a price of Rs.0.15 and thereabouts. Ironically, the price of Rs0.15 was the call sold on a deep in-the-money option which was Rs2,128 in the month SO you can just imagine the kind of losses that the seller of the option would have made on the deal.

Typically, fat finger trades are caused by human error and it normally happens in the deep options that are not too liquid as otherwise the price time priority will come into play. Normally, exchange of blocks is where such errors are most likely to happen. On paper, the seller of the call option would have ended up with losses of Rs266 crore. If you recollect, there was a fat finger trade in the US in 2010, which pulled down the entire market.

Let us look at the actual modalities of the trade. A large quantity of Nifty 50 options contracts with strike price of 14,500 Nifty call were sold at Rs0.15 per unit. Now, that is the lowest price, so if you consider the tick by tick data, the actual price on an average would have been much higher. But if for understanding we take that Rs0.15 as the selling price for the 25,000 lots, then the loss would be around Rs266 crore. That is because, the 14,500 call option contract was in the money (ITM) by Rs2,128 with Nifty closing at 16,628.

Of course, the buyer would have made the profit. But, as mentioned earlier, the entire amount will not be a profit as it would depend on the tick by tick data on how the options got executed. Either ways, the loss for the seller would still be huge. But this certainly raises some very uncomfortable questions about the risk management systems at the broker, the risk management and compliance set up and the checks and balances at the exchange.

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