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Infosys Plunge Gives Options Traders 200% Profit on Strangle Bet

Infosys Plunge Gives Options Traders 200% Profit on Strangle Bet
Infosys closed yesterday at 2,916.7 rupees. Photographer: Tony Avelar/Bloomberg

Options traders who bet Infosys Ltd.’s sales outlook would surprise investors tripled their money today as the stock tumbled the most in a decade.

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 245 percent at 4:36 p.m. in Mumbai, based on the most-traded contracts. A similar strategy called a straddle returned 118 percent, data compiled by Bloomberg show. Infosys shares tumbled 21 percent to 2,296.65 rupees, 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. India’s second-largest software maker said annual sales may increase 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., 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.

Strangle Payout

Shares of the Bangalore-based company 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 390.2 rupees at the close today.

Volumes in Infosys’ put options jumped to 313,902 contracts 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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