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D Street diary: IRCTC bulls run over, savvy Tata Motors traders 'call’ right, brokers 'LAP’dance

market | Oct 25, 2021 7:26 AM IST

D-Street diary: IRCTC bulls run over, savvy Tata Motors traders 'call’ right, brokers 'LAP’dance


D-Street diary takes a close look at the chatter, developments and shenanigans on Dalal Street. This week, we flag how influential traders are pre-empting big moves in stocks by buying deep out of the money options.

‘Bullet train becomes burning train’ was one of the memes doing the rounds on social media and Whatsapp groups last Tuesday as IRCTC shares crashed 15 percent within a matter of minutes. There were two rumours doing the rounds during the frenzied trading during the last 45 minutes. One was that the government was planning to appoint a regulator for the railway sector. Given that most bulls were sitting on leveraged positions, they jumped off in panic, unaware that the concept of a railway regulator has been in the works for more than four years now. Not that any such awareness would have made a difference when faced with a margin call.

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The other chatter was that the stock was likely to get back into NSE’s futures and options ban list. This would have triggered some bit of liquidation of long futures. Because when a security is put in the ban list, fresh derivatives positions are barred, and only existing positions can be reversed.
Talk on the street is that the wave of selling in the stock was timed such that it would take the weaker bulls by surprise and force them into unwinding their positions.
Many bulls are still hanging on to their positions in the stock as well the derivatives, hopeful of a better exit price by F&O expiry this Thursday.
Interestingly, there was a huge demand for deep out of the money puts of strike prices 4500, 4600, and 4700 a couple of days before the selloff. Buyers of put options bet on a price decline, while those on the opposite side of the trade are confident that the price will not fall by as much.
On October 19, prior to the collapse in the stock, there was massive activity in the deep out of money 6500 call options. The demand for call options was not surprising, given the sustained rise in the stock and the positive chatter around it till then. But it would take guts and deep pockets to write call options for a stock with so much momentum behind it. In other words, those who sold the call options are confident that the price will not rise above 6500.
If it is smart money on the right side of these options trades (buyers of puts and sellers of calls) then the IRCTC stock may have peaked out for the time being.
Options: The new centre of action
Options trading has become a big hit with Indian ‘Robinhood’ traders, many of whom have made good money easily over the last year, because of the near one-sided rally in the market. A good number of young entrants to the stock market have chosen derivatives trading as their entry point, after attending crash courses in futures and options. Having limited capital, but eager for a piece of the stock market action, these players see derivatives trading as the route to make big profits in the shortest possible time, with minimum risk.
Average daily turnover in single stock options has grown almost fivefold to nearly Rs 6000 crore over the last 18 months. Activity in single stock futures too has surged, as traders try and hedge their options trade through futures positions. As a result, stock futures and stock options now account for roughly 66 percent of daily average turnover in the derivatives segment, compared to around 52 percent pre-pandemic.
But the flip side of this trend is that many of these rookie players are becoming easy prey for wily old-timers, who are now making most of their trading profits through options. The modus operandi is to buy or sell deep out of the money options and then move the stock price in concert with portfolio managers who will buy or sell large blocks of shares.
‘Calling’ it right
The Tata Motors and Tata Power stocks saw massive single-day gains earlier this month. The announcement about TPG's investment in Tata Motors’ electric vehicle arm would have come as a surprise for most, but some well-networked traders appear to have had a whiff about it, judging by the steady purchase of deep out of the money call options of 400 strike from the last week of September itself. This, even as the stock was stuck in a range between Rs 300 and Rs 330. The calls, which were going for less than Rs 10 in the first week of October, touched a high of Rs 122 on the day when the TPG investment was announced.
Massive buying of calls in a stock can be self-fulfilling, as more buyers enter the fray anticipating a big rally in the stock. Sellers of the call option try to hedge their position by either going long on futures or buying the stock. All this has the effect of pushing stock prices higher and becomes a case of the tail wagging the dog. Last year in September, SoftBank is said to have triggered a huge rally in frontline tech shares on the Nasdaq by taking outsized bets on the call options of those stocks.
Last month, Zee saw huge buying in out of the money call options a couple of days before Invesco demanded an EGM, and which was followed by influential investors buying huge blocks.
All this indicates that to get an idea of where a stock could be headed, keep a close watch on the activity in the options contracts.
Broker-NBFC ‘lap’dance
Smart brokers have managed a workaround for their preferred clients on the SEBI rule on 100 percent margin payment. Before this rule, brokers would regularly fund their clients’ margin requirements in return for an interest charge. Since that is no longer allowed, brokers have come up with other ways to fund their high-volume clients. Chatter is that NBFCs either owned by brokers or which have close ties with broking firms are funding clients in the guise of loan against property (LAP). Since many big-ticket traders have sizeable investments in real estate as well, they are able to put up collateral for such an arrangement.
Read previous D-Street Diary columns here:
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