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Traders make a windfall on Infosys' sharpest single-day rise in 20 years

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MUMBAI: Infy's unexpected 17 per cent jump on results day — the highest single-day rise in two decades and the second rise on results day over the last 11 quarters — resulted in windfall gains for derivatives traders who bet the stock could move sharply either ways (up or down).

These traders made a 77 per cent gain in just five days through Friday by buying a call and put option of the same strike price. However, those who sold the options were faced with huge losses as they bet that prices would not move up or down sharply.

Simply put, this means if the underlying Infy stock rises, the institutions add more calls to the straddle and if it falls they add more puts.
The option seller collected premiums from the buyers. The buyers are traders who use complex options strategies to bet on price change intensity prior to an important event, like results.

In Infy's case, they bought both call and put options of the same strike price - the price at which an option can be exercised - expiring in January by paying a premium. This strategy is called long straddle.

They bet the premiums would rise. A call option gives a holder the right but not the obligation to buy an underlier at a strike price by paying a premium at a fraction of the contract value, while a put gives a holder the right to sell it.

However, rather than giving or taking delivery, options on Indian stock markets are cash settled. A buyer of a call makes money when the underlier (stock) rises and a put buyer profits when the underlier falls.

On the Infy derivatives counter, traders, particularly institutions, on Monday bought a call and put option of the 2,400-strike price. In addition, these institutions hedged the delta or ratio of price change in underlier to that of the options price.

Simply put, this means if the underlying Infy stock rises, the institutions add more calls to the straddle and if it falls they add more puts. Everything seemed to be going for the option seller and put buyer's way from Monday till Thursday during which Infy fell 2.2 per cent.

However, on Friday, after its results were declared, the Infy stock opened up 8 per cent before ending the day higher at 17 per cent. While the premium on the 2,400 put ended down by Rs 114 or close to zero, the 2,400 call premium ended up a whopping Rs 320 overnight. Traders who bought the 2,400 call-put paying a combined premium of Rs 180, gained Rs 140 or 77 per cent in 5 days as the call premium rose to Rs 320.

However, these traders could not optimise profits as the 8 per cent gap-up opening did not give them the opportunity of buying more call options.

"Traders, particularly institutions, benefited by initiating a long straddle in at-the-money 2,400 options when the underlier quoted at Rs 2,374 on Monday. The stock fell steadily to Rs 2,322 or a little more than 2 per cent between Monday and Thursday. This gave rise to expectations that Infy would keep its faith with those expecting a fall. However, fortune favoured traders who initiated long straddles as Infy ended up 17 per cent on Friday," said Yogesh Radke, head of quantitative research at Edelweiss Financial ServicesBSE -1.28 %

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