Traders who bought out-of-the money puts and calls on Infosys yesterday, a wager known as a strangle that benefits when volatility increases, earned 217 percent as of 1:28 p.m. in Mumbai, based on the most-traded contracts. A similar strategy called a straddle returned 107 percent, data compiled by Bloomberg show. Infosys shares tumbled 20 percent to 2,346.5 rupees, set for the biggest drop since April 2003, after the company’s annual sales forecast trailed analysts estimates.
The windfall shows few traders anticipated Infosys would swing so much. The shares moved an average 11 percent the previous two times Infosys reported results. The Bangalore-based company, India’s second-largest software maker, said annual sales may rise as little as 6 percent in the year ending March 2014, versus the 12.7 percent average estimate of analysts surveyed by Bloomberg.
“Obviously no one could predict such a move” in Infosys shares, Manoj Murlidharan, vice president at Mumbai-based India Infoline Ltd. (IIFL), said in a phone interview today. “But those who got on the right side of the trade made a lot of money. The bearish squeeze will keep Infosys stock under pressure.”
Today’s share move was more than double what the options market was expecting as of yesterday, based on prices paid for April contracts with a strike price closest to yesterday’s closing share price.
Infosys closed yesterday at 2,916.7 rupees. At the same time, the price of the 2,900 straddle, which combines a put and a call at that strike price, was 270 rupees. That indicates traders expected a move of about that amount, or 9 percent, in order to break even on the position.
A strangle combining 3,100 calls, yesterday’s most-traded call contract, with 2,700 puts, cost 112.95 rupees yesterday, based on closing prices. The combination was valued at 357.6 today.
Volumes in Infosys’ put options jumped to 232,845 contracts today from 125,421 contracts yesterday. Put trading exceeded calls for the first time in a month. Puts give the right to sell a security for a certain amount, called the strike price, by a given date. Calls convey the right to buy.
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