Sell India Bank Call Options Before Earnings, QF Assets Says

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Indian options traders should sell calls in banks as their quarterly earnings are expected to disappoint, according to hedge fund QF Assets Ltd.

The CNX Bank Nifty index rose 2.3 percent to 18,617.85 at the close, after falling 2.8 percent in the first quarter. The 50-stock Nifty, which gained 2.5 percent in the three months ended March 31, advanced 1.1 percent on Wednesday. Nine of the S&P BSE 200 index’s 10 decliners in the past three months were banks, led by Oriental Bank of Commerce, which slid 38 percent.

Selling calls is an options strategy that pays off when the underlying stocks decline. Bank of Baroda, Punjab National Bank and ICICI Bank Ltd., three of India’s five largest lenders by assets, reported an increase in bad debts in their results for the quarter ended Dec. 31. Indian companies will announce earnings for the January-March period from this month, with IndusInd Bank Ltd. and Tata Consultancy Services Ltd., the nation’s largest software company, due to report on April 16.

“We are advising clients to sell call options on every rebound,” Supreeth Shankarghal, a director at QF Assets, said by phone from Bengaluru. “Bank stocks will be under pressure amid concern that quarterly earnings will disappoint and there will be no rate cuts in the near term. There are fresh shorts being added on every rise.”

The Reserve Bank of India has cut its benchmark interest rate twice this year after a slump in crude oil prices helped cool consumer-price inflation.

The India VIX Index, a measure of protection against stock market swings, tumbled 5.7 percent to 13.66. Stock markets in India are closed for public holidays on Thursday and Friday.

The Nifty trades at 15.9 times its 12-month projected earnings, compared with this year’s peak of 16.8 times on March 3. The MSCI Emerging Markets Index is valued at 11.9 times.

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