Many traders who'd created bearish bets on Infosys in anticipation of weak third quarter earnings were in for a shock after the better-than-expected earnings triggered a rally in its shares on Friday.
Analysts said many had already sold stock futures and call option contracts of Infosys ahead of the results, as it was widely expected that the software bellwether's results would disappoint yet again, a trend seen in the past many quarters.
When a trader sells stock futures, he is betting the share price will decline. While selling (or writing) a call option, the trader is expecting limited upsides. In the case of Infosys, traders sold call option contracts till strikes of 2,600 before the results. This means they did not expect the shares to cross Rs 2,600. The stock, which closed at Rs 2,320 yesterday, jumped almost 17 per cent to close at Rs 2,712.60 on Friday.
What caught traders on the wrong foot was the pace at which the stock rose after opening with a gap. This prevented many from cutting their bearish bets, as squaring up of their positions at the current levels would have resulted in huge losses.
"Traders holding short positions with a view to get an opportunity to minimise their losses in case of any profit booking by bulls will be forced to close their positions if Infosys closes above Rs 2,810 in the next few trading sessions," said Shshank Mehta, derivatives strategist at Shah Investor's Home. Any short-covering could push Infosys to Rs 3,000, said Mehta.
Traders, who partly base their bets on past share price movements, had every reason to expect a stock decline after the October-December earnings. On the past four occasions, Infosys shares had fallen by five to 13 per cent on the day of the quarterly result announcement. A larg section of analysts and others were also predicting weak numbers from the company this time but it surprised investors by keeping the full-year forecast intact.
Analysts said options traders were less active in Infosys contracts this quarter than in the previous one. A larger chunk of the activity was in stock futures.
"The fact that IVs (implied volatility) did not move beyond 38 before the results is an indication of lower activity in Infosys options during the quarter. Last quarter, IVs had shot up from 28-30 to 52," said Siddarth Bhamre, head-derivatives, Angel Broking.
Implied volatility, a key aspect of options premium pricing, reflects traders' expectations of near-term risks in a stock or an index. A rapid rise in IVs is an indicator that traders expect some sharp moves in the stock in the near term.
|SHOCK FALLS |
Infosys' share movements on result day in the last four quarters
| || ||Date |
|Closing||% chg on |
|Oct-Dec (2011-12)||Result day's close||Jan, 12||2,588.25||-8.40|
|Previous day's close||Jan, 11||2,826.60|| |
|Jan-Mar (2011-12)||Result date||Apr ,13||2,402.55||-12.70|
|Before result date||Apr, 12||2,750.65|| |
|Apr-Jun (2012-13)||Result date||Jul, 12||2,264.40||-8.40|
|Before result date|| |
|Jul-Sep (2012-13)||Result date||Oct , 12||2,395.35||-5.40|
|Before result date||Oct, 11||2,533.20|| |
|Prices on BSE in Rs|