Expiry Day Turmoil Shows Jane Street Was Never the Only Problem

Those following the Jane Street saga appear split into two camps. To some, the firm is a villain deploying sophisticated algorithms to exploit retail options traders seeking modest profits. To others, Jane Street has merely exploited market mispricing at scale, a tactic that, while tilting the odds in its favour, remains within the rules. These observers argue that SEBI’s real challenges lie elsewhere.

The SEBI interim report on Jane Street revealed at least one of its strategies in striking detail. This transparency meant market participants knew expiry day tactics were under intense scrutiny. It would likely avoid similar trades that could trigger regulatory attention, particularly since Jane Street had been allowed back into the market.

Yet history seems to have repeated itself. 

On July 31, an expiry day for Nifty 50 options, the market displayed an almost identical pattern of swings to those seen during Jane Street’s now infamous trades of January 17, 2024.

To recap the events of January 17, an expiry day for Bank Nifty options, the index gapped lower at the open by 1,600 points after HDFC Bank’s disappointing results. At the open, at the money puts were priced at ₹123 while calls traded at ₹653, even though they should have been roughly equal. Jane Street is alleged to have bought the underpriced puts and sold the overpriced calls, creating a short exposure in Bank Nifty through options. To hedge this exposure, the firm is believed to have purchased Bank Nifty futures and bank stocks. This buying helped lift the index by 700 points by mid morning. Later in the day, Jane Street unwound its hedges ahead of expiry, triggering a 1,200 point fall. The result: its long puts expired in the money while its short calls expired worthless, generating significant gains.

Fast forward to July 31, 2025 at 9:15 a.m. Overnight, the Trump administration had imposed 25% tariffs on India after trade talks collapsed. The Nifty opened 200 points lower at around 24,650. At the money puts traded at ₹50 and calls at ₹108, even though both should have been priced roughly the same. This mispricing made it profitable for arbitrageurs to buy puts and sell calls. Open interest in both surged between 9:30 a.m. and 10:30 a.m., confirming that such trades were underway.

The resulting short exposure led to aggressive buying of Nifty 50 futures and, likely, underlying stocks, driving the index up from 24,650 to 24,950 by 1:15 p.m. As expiry approached, arbitrageurs began unwinding hedges, triggering a sharp sell off that pushed the index down to 24,750 by close — a 200 point drop. Puts that had traded near ₹25 soared to ₹150, while calls that were worth around ₹30 became worthless. Retail traders who entered short put and long call positions between 10:30 a.m. and 1:15 p.m. suffered heavy losses. While exact trade data remains known only to regulators and exchanges, the pattern clearly mirrored the events of January 17, 2024, when Jane Street’s strategy first drew SEBI’s ire.

So what can be concluded about the events of July 31? There are three plausible explanations. First, Jane Street has not changed its approach and continues to pursue strategies that SEBI had sought to curb. Second, other large arbitrageurs, having understood Jane Street’s method from the regulator’s report, may now be using similar tactics, creating the same sharp expiry day swings. Third, these moves reflect logical trades from an arbitrageur’s perspective, with market gyrations occurring whenever mispricing opportunities arise on expiry days.

The most likely scenario is the third: a collective outcome of many smaller arbitrageurs acting in their own economic interests, producing the gut wrenching volatility in the underlying index. Retail traders unfamiliar with these dynamics once again bore the brunt of the losses.

The first and second explanations seem unlikely given SEBI’s close watch on large expiry day trades, though the regulator must still investigate to rule them out. The third is therefore the most plausible, underscoring how similar moves will likely recur whenever options are mispriced and arbitrageurs act on those signals particularly on expiration days.

This raises several uncomfortable questions. If such gut wrenching swings can happen without a single identifiable villain, was SEBI’s injunction against Jane Street warranted in the first place?

Why are options so persistently mispriced on expiry days? Retail behaviour is a major factor. Many traders continue to sell naked options for the perceived “free” premium or buy low priced contracts as lottery tickets, ignoring probabilities and risk.

How can such participation be better controlled, particularly on expiry days, so that arbitrage opportunities are less frequent and less destabilising?

Why not eliminate weekly options altogether and revert to monthly expiries, which would reduce the number of such dislocations?

Market timing also merits review. Derivatives could open at 10:15 a.m., after underlying cash prices stabilise, so option pricing is anchored to a clearer reference.

Settlement mechanics are another lever. Calculating settlement prices over a broader window, as some commodity markets do, would make it harder for large trades to sway final expiry levels. This could also dampen volatility and discourage speculative spikes.

Finally, risk monitoring could go further. Exchanges already compute margins multiple times a day using the SPAN methodology; extending this to track aggregate client delta and imposing limits would allow early intervention when positions become too one sided. SEBI has begun moving in this direction, though crucial details are still unclear.

Without reforms along these lines, expiry days are likely to keep delivering bouts of extreme volatility, with or without Jane Street.