'Call' buyers gain big as YES Bank rallies on news of investment offer

On Thursday, option premium for Rs 65 contract was up 270 times at day's high

The surge in Yes Bank shares on Thursday led to windfall profits for derivatives traders, who had bought deep out of money 'call' options of the bank.

Before the bank disclosed that it had received a binding offer from a global investor, the call option for a Rs 65 strike price was hardly fetching any premium. After the disclosure, however, the option premium zoomed to a high of Rs 13.5. From its opening price of five paise, this was a 270-fold surge.  

On Thursday, shares of Yes Bank clocked intra-day gains of 34 per cent (at a day's high of Rs 76), after opening at Rs 56. The bank said that it received an offer for an investment of $1.2 billion. The call option for Rs 60 strike price also saw sharp gains. After opening at 40 paise, the option premium for this contract surged to highs of Rs 18.4, a 46x jump. The call option for Rs 55 strike was up 24x at the day's high.

Call options are derivative contracts that give the buyer a right to buy the underlying asset at the agreed strike price. When the traded price of the underlying asset is significantly away from this strike price, the option premium is much lower. The buyer of this contract gains as the gap between trade price and the strike price narrows.

On the other hand, traders who had sold the 'call' contracts expecting the value of the option premium to erode on the expiry day, were caught on the wrong foot as prices moved firmly in the opposite direction on Thursday.

Analysts say that the stock is likely to consolidate at current levels.

"From here on, we don't see major upside. Unless there is any big announcement, the share price is likely to trade in the range of Rs 60 and Rs 75," said Dharmesh Shah, technical analyst at ICICI Securities.

Market experts say the price action on Thursday has discounted the positives for the company to a large extent. On Friday, share price of Yes Bank closed 5.5 per cent lower to Rs 66. According to market sources, the Securities and Exchange Board of India could also review Thursday's trading action to ensure that there were no serious violations of the regulatory norms.

There has been heightened volatility in the shares of Yes Bank this year. Concerns over the asset quality of the bank's loan book, promoter pledging and weak capital position have kept the share price under pressure. The stock has lost 64 per cent year-to-date. From its 52-week high of Rs 285, it is trading 76 per cent lower.