• Skew spread at 18-month low indicates upside: Anand Rathi
  • State Bank of Travancore among top gainers on BSE 500 Index

The cost of options to protect against a drop in State Bank of India’s shares tumbled to a 18-month low amid optimism about the lender’s merger with its associates.

One-month put options with a strike price 5 percent below the bank’s shares cost 7.7 points less than calls priced 5 percent above them at 10:44 a.m. in Mumbai, data compiled by Bloomberg show. The spread, known as skew, is the lowest since November 2014. About 7,300 put option contracts were traded, versus a 20-day mean of 7,241.

The negative spread shows the stock has “greater upside potential after the recent fall,” Chandan Taparia, a derivatives analyst with Anand Rathi Financial Services in Mumbai, said by phone.

State Bank dropped 12 percent from a three-month high on April 26 through Tuesday, dragging down its 14-day relative strength index to 39.7, the lowest since Feb. 26. The stocks rose 1.1 percent at 12:06 p.m. in Mumbai.

State Bank of India said Tuesday it will seek government approval to merge associate banks -- State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore -- with itself. Operational synergies from the merger may outweigh near-term concerns about the increase in costs from the difference in retirement benefits between the lenders, Taparia said.

State Bank of Mysore jumped 8.3 percent to a nine-month high, while State Bank of Travancore headed for its highest price in about seven months.

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