Traders were caught on the wrong foot on the Karnataka Bank counter on Thursday, as their derivative bets went awry following an unexpected 14 per cent plunge in the stock during the day. They were punting on a further surge in the stock, amid speculation that the bank might be merged with the country’s largest private sector lender, ICICI Bank, which has been repeatedly denied by both parties.
The stock, among the top performers on the bourses so far in 2012, had jumped 140 per cent in the last three months till yesterday. The rally gathered steam in December, with the stock rising about 13 per cent till Tuesday, when it hit a 52-week high of Rs 198.80. The stock closed at Rs 159.90 on Thursday.
Brokers said many traders considered the unhindered ascent in the stock despite the rebuttals as a signal that such a deal was in the offing. Usually, firms are secretive about corporate actions such as mergers, which have an impact on stock prices.
- The stock has risen 140% in the last three months on merger talks
- Stock continues to rise despite repeated denials by banks
- Traders buy Karnataka Bank futures contracts on hopes the rise in stock will continue
- Bets turn sour after Karnataka Bank shares plunge 14% unexpectedly
- Traders staring at huge marked-to-market losses after plunge
Such a perception encouraged several traders, including retail, to buy stock futures of Karnataka Bank late last week. Open interest in Karnataka Bank contracts rose about 43 per cent to 6,900 in three days to December 10, said Amit Gupta, derivatives head of ICICIdirect. Analysts said such a rapid surge in activity in Karnataka Bank futures does not happen often and traders wanted to cash in on the bullish sentiment.
“There have been a lot of speculative longs (bullish positions) in the last few days on hopes of some positive news. But, the fall on Thursday was so rapid that few would have got an opportunity to exit,” said Siddarth Bhamre, head-derivatives, Angel Broking.
Thursday’s stock decline eroded Rs 500 crore in shareholder value at one stroke to about Rs 3,000 crore. ICICIdirect’s Gupta said the volume-weighted average price (where maximum volumes happen) of the stock since December 1 is Rs 183 apiece, which indicates the potential average losses that traders could have incurred.
Analysts said it was the speed at which the stock fell after 2 pm that caught traders unawares. Few were expecting such a rapid decline when the stock was lazing above the opening levels for most of the day.
While the exact reason for the decline is not known, a theory doing the round in the market is that selling by a Mumbai-based high networth individual known for some of his pharma picks this year, who had taken a trading bet on Karnataka Bank, could have dumped the stock. Brokers said the pace of the selling triggered stop losses giving other traders very little opportunity to exit and resulting in them sitting on huge marked-to-market losses. “The fact that there was no short covering at lower levels which help a small rebound makes me scary about the stock’s near-term prospects,” said a trader.