The traders sold strangles on TCS and Infy on anticipation that the former would not correct more than 7 per cent and rally above 6 per cent from Friday’s close of Rs 2,013 until expiry.
Option sellers’ activity on TCS and Infy counters on Friday, before the companies announced their January-March results, indicate that they expect the former to trade in a Rs 1,900-2,100 range and Infy to oscillate between Rs 700 and Rs 800 apiece until expiry on April 25. After Friday’s robust results, TCS could immediately test the upper band; while Infy, which pared guidance for FY20, could open lower from its Friday closing prices.
The traders sold strangles on TCS and Infy on anticipation that the former would not correct more than 7 per cent and rally above 6 per cent from Friday’s close of Rs 2,013 until expiry. On Infy, they expect downside of not more than 7.6 per cent and upside not greater than 8.2 per cent from Friday close of Rs 748. They received premiums of Rs 35 a share ( 250 shares equal one lot) for selling the TCS strangle and around Rs 9 a share (1,200 shares make a lot) for selling the Infy strangle. At contract level on TCS, they received Rs 8,750 and on Infy Rs 10,800.
A strangle is an option’s strategy that involves selling a call and put of different strikes but with same expiry. The sold call and put strikes are more or less equidistant from the prevailing market price. For e.g., traders on Friday sold a 1900 strike put and a 2100 strike call expiring April 25 on TCS which closed at Rs 2013. On Infy, they sold a 700 strike put and 800 strike call which again are at same intervals from Friday close or Rs 748.
“The four strikes witnessed the largest addition to open interest (OI) than any other strike on TCS and Infy on Friday”, said Nitin Kedia, business head, Kedia Commodity, the country’s first unified brokerage. “Post results, the sellers reckon that TCS will operate in a Rs 100 band; while Infy in a Rs 50 band until expiry from Friday’s closing.”
If the prices remain in this range until expiry, strangle sellers will pocket the entire premium paid by the buyers. If, however, the range breaks either side by expiry they will face heavy losses. Upper breakeven point for TCS above which they will lose is Rs 2,135, while the lower breakeven is Rs 1,865. For Infy, UBEP is Rs 809 while LBEP is Rs 691.
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With just seven trading days left until expiry from Monday what would aid the option sellers is theta, or time decay. For e.g., each passing day that TCS trades in Rs 1,900-2,100 range the sold options lose Rs 2.7 daily or almost Rs 19 until expiry. Given that the TCS management retained their bullish stance after a record quarterly profit performance, that stock could test the upper range when markets open on Monday; while Infy could test the lower range.
