Short squeeze likely in SAIL stock

Mumbai: Traders who have initiated bearish or short bets on the SAIL stock ahead of the government’s offer for sale (OFS) announcement, could face a short squeeze this week, given the overwhelming response from retail and non-retail investors to the share sale on January 14-15.

Short squeeze refers to traders being forced to cover their short derivatives positions because of a rise in asset prices. A short position is covered by buying it back, forcing the price to move higher. In SAIL’s case, the covering could be induced by the “stupendous” response to the OFS, said Chandan Taparia, derivatives head at Motilal Oswal Financial Services. The retail portion of the OFS was subscribed over five times and the non-retail portion over four times.

On January 13, the day of the announcement post-market closing, SAIL was in a derivatives ban, which meant only existing futures and options positions could be squared off, with no fresh positions allowed.


The next day when the stock exited the ban, huge shorting happened on the derivatives counter due to the discounted OFS floor price, causing the underlying share to plunge 10 per cent to Rs 67.2 and forcing it back into a ban for January 15.

However, as news percolated of the non-retail response on January 15, there was piling up of fresh bullish bets which enabled the stock to recover 4 per cent to Rs 70.15. The huge build-up has caused the stock to remain in a ban for Monday, January 18.

The build-up of outstanding derivatives positions on Friday, despite the ban and a stiff penalty being imposed by the exchange for violation of the same, has set the stage for a “huge bull-bear tug-of-war,” on Monday, said Sunil Pachisia, director-institutional sales, Pratibhuti Vinihit. Pachisia expects the strong investor interest for the OFS to spur demand for SAIL shares on the secondary market. This could force the bears to cover their futures and options short positions, causing prices to rise.

The stock’s price range for the current month is Rs 63.35-76.65. Analysts expect the bias to be tilted to the upper end of the band. The exchange penalty on a client/trading member for violating the F&O ban is 1 per cent of the value of the increased position, subject to a minimum of Rs 5,000 and maximum of Rs 1 lakh.