Spectre of losses clouds Infosys options frenzy

Chances of Infosys' premium on options appreciating further on Friday have diminished after they rose to near record levels Thursday

Traders who bought Infosys’ options in pairs in the last couple of sessions ahead of the first quarter results on Friday stand to lose money on these bets. This is because the chances of Infosys options’ premium values appreciating further on Friday have diminished after they rose to near-record levels on Thursday, said analysts.

Traders usually purchase a call or a put option depending on how they expect an index or a stock to behave: if the stock is seen rising, they buy calls and if the stock is expected to fall, they buy puts. However, there are a set of savvier traders, who do not bet on the direction; instead, they look to profit from a sharp move in the stock either sides. For this, these traders simultaneously buy a call and a put option.

Such trades are usually initiated before key events, the outcome of which are difficult to guess and have sparked sharp movements in stock prices. In the last five quarters, Infosys shares were seen moving an average of six per cent on the day of the results. The frenzied activity in Infosys options suggests traders are expecting a sharp move on Friday as well.

Average implied (IV) volatility — traders’ expectations of a sharp movement in an index or a stock based on options’ prices — of Infosys options hit 90 per cent on Thursday. Traders watch IV closely because it is a key aspect of options’ premium pricing. So, when IVs rises, options’ premium values also rise and vice-versa. The Infosys options’ IV had touched 90 per cent during the Lehman Brothers crisis in 2008. Analysts said IV levels of 55-60 per cent are considered high for Infosys or any stock on the Nifty.

Analysts do not rule out a sharp move in Infosys’ shares on Friday after the results, but that may not result in them recovering their trading costs in these options strategies.

“The record high IVs will make it very difficult for vol (implied volatility) buyers to make money even if the stock sees a sharp move of 10 per cent,” said Siddarth Bhamre, head of derivatives at Angel Broking.

Popular volatility trading strategies are straddle and strangle. In strangles, traders buy a call and a put of the same stock or index belonging to the same series.

In the case of Infosys, traders bought 2,200 put and 2,700 call, or 2,200 put and 3,000 call or 2,000 put and 3,000 call, which reflected in the rise in their premium values in the past couple of days. Infosys shares rose 1.4 per cent to close at Rs 2,535 on Thursday.  If the stock does not move after the results, traders will still lose the money they paid as premiums to buy the options.

Analysts said another section of traders aggressively sold (or wrote) Infosys strangles on Thursday, as they felt there was limited scope for premiums to rise further.

“It looks like the strangle (option) sellers will make the money tomorrow because the IVs just do not look sustainable, even if the stock shoots up or crashes,” said Ashish Chaturmohta, head (technical and derivative research) at Fortune Equity Brokers.

The rush to buy Infosys’ options has resulted in its futures contracts activity remaining relatively subdued. Infosys futures, open interest was approximately 3.2 million units on Thursday against an average of five million a day before the company’s results.