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D-Street Diary: IRCTC investors railroaded, perils of F&O, distribution game

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D-Street Diary takes a look at the chatter, trends and shenanigans on Dalal Street. This week, we take a look at how some smart traders made a killing in IRCTC, and how first time investors are coming to terms with a serious correction the market.

D-Street Diary: IRCTC investors railroaded, perils of F&O, distribution game
“Who got the free pass in IRCTC?” was the most asked question in the market Friday as the wild swings in the stock during the early trading hours led to a handful of traders making a killing and scores of others getting killed. But nearly everyone was certain about one thing: some smart players had access to information the rest of the market did not.
Last week, when IRCTC shares collapsed on heavy volumes after hitting a high of around Rs 6400, the market was abuzz with chatter about some influential players making an opportune exit, and at the same time swinging the stock price through coordinated selling.
By sheer coincidence, if one would like to call it that, plenty of out-of-the-money put options (5000 and 4500 strike) were bought cheaply a couple of days earlier. The buyers of these options were betting on a decline in prices and gain when the stock falls below the strike price. And these traders profited hugely as the options soared nearly 20-fold over the next few sessions when stock price nosedived.
A similar pattern was witnessed again this week when there was heavy interest in deep out of the money put options (800 strike price) hours before IRCTC informed the stock exchange about its decision to split the convenience fee revenues with the Ministry of Railways.
The following morning, the value of these options surged seven-fold as the stock price crashed to Rs 640. Even before the stock had begun its recovery, there was massive action building up in the 750 strike call options.
Buyers of call options are betting the stock price will rise, which it did as soon as the Railway Ministry reversed its decision seeking half of IRCTC’s revenues from convenience fees. The options' value rose fourfold within a couple of hours, fetching a windfall for traders who had the ‘foresight’ to buy them.
Veteran brokers say the big money in trades based on information not yet public, is now happening through the options market.
Whatever the reason for the Railways Ministry’s flip flop on revenue sharing with IRCTC, it has once again revived the market’s bugbear about PSU stocks—government shifting goalposts midway through the game. This, unfortunately, comes at a time when the market was beginning to warm up to PSU stocks in the wake of Air India’s successful privatisation.
Leverage – a double-edged sword
Many new entrants to the market are slowly learning—at great cost—that leveraged bets can cut both ways. In a rising market, leveraged trades fetch big gains without the need for too much capital.
But when the market corrects too fast, the gains of the past few months can be wiped out in no time. This holds both for those dabbling in futures and options (F&O) as well as for those punting on mid and small-cap stocks.
Some ads for trading apps claim that investing in the stock market is much easier than deciding which vendor to have paani puri from. But veteran brokers point out it is exactly such decisions (on stocks, not paani puri vendors) that have landed many first-time investors in trouble.
With markets rising one way, Indian ‘Robinhoods’ got bolder and kept scaling up the size of their bets, confident they had mastered the game. Of course, they had run into the occasional bear, but more the tame kinds like those in zoos, circuses and on street corners on the leash of a madari.
This left them ill-prepared for an encounter with the more deadly variety that stock markets are renowned for. Brokers say the mauling in many mid and small-cap shares, not to mention F&O trades, has been so severe that many newbies will not be venturing into the market for a while, some permanently.
As for the survivors, they will be taking more measured bets and are unlikely to be seen or heard on social media platforms for a while.
The great wealth (re)distribution
The steep correction over the last few sessions notwithstanding, Old Monk is of the view a one-way downtrend seems less likely. Technical charts are indicating a distribution pattern, meaning many high-flying names may have peaked out for the time being.
Yet, these stocks won’t just collapse. First-time investors may have finally got to know what the term ‘correction’ means. But they are yet to get acquainted with other market terms such as dead cat bounce, relief rally, sucker’s rally, bear market rally etc, which will be slowly revealed to them over the next many months.
Many stocks that have corrected 25-30 percent from their peaks look attractive compared to what they were quoting a few weeks back. Also, many investors who bought the stock at higher levels will be tempted to average their costs by buying at current prices.
So, these stocks could see a temporary bounce but are unlikely to go anywhere near their recent highs. Given the upbeat mood in global markets, the Indian market too could go past recent highs. But the stocks at the forefront of action could be different from the ones that had a fantastic run so far.
So, choose stocks and strategy with care; the easy money has already been made. Growing one’s wealth hereon will be hard work.
Read the previous D-Street Diary columns here
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