MUMBAI: It’s that time of the year when punting on stock derivatives rises. Quarterly results season. Many retail level traders are punting through the stock options route with SEBI’s new upfront margin rules and slashing of intraday leverage making futures’ trading costlier than before. Small retail clients normally purchase options like calls and puts, depending on whether they’re bullish or bearish. A call buyer is bullish while a put buyer is bearish.
The reason they choose to buy, rather than sell options is because buying involves them paying the options’ seller a premium, price for the option, while selling involves placing a margin with the exchange’s clearing corporation which is equal to a margin placed for initiating a futures trade, and, therefore, costlier.
Besides this, an options’ seller faces unlimited risk while a buyer’s maximum risk is limited to the premium paid, while profits can be huge if the stock moves more than anticipated, either up or down.
Many retail-level traders wagered big ahead of ICICI Bank’s Q3 results by buying a huge number of call options, expecting the price of the share to rise when markets open Monday. The bank reported numbers on Saturday . The share price raises the option premium, enabling call buyers to profit. However, were the share to fall, they would lose money as the premiums (paid to the call seller) would shrink upon market opening Monday.
For instance, ICICI Bank closed at Rs 810.65 apiece Friday. Clients, among others, punted big by buying call options on ICICI at 810 - outstanding trader positions or open positions at the 810 call rose by 1386 contracts to 3056 contracts at close on Friday.
The volume weighted average price (Vwap) of the option was Rs 13.16 a share (1375 shares make one option’s contract) on Friday. A client must pay Rs 18095 to buy one contract based on the Vwap.
This means ICICI would have to trade or expire above Rs 823.16 (810 + 13.16) from Monday through Thursday, when the contract expires, for the buyer to gain.
If the Street likes the bank’s numbers, the share price could rise significantly and so can the contract price. If it’s unenthused the share could remain flat in which event the option premium would decline to due to time decay. If the Street is disappointed, the share could fall and the call buyers could lose money as their premium would erode soon .
Options show the ICICI stock could face resistance at Rs 830, Rs 850 and Rs 900. Supports kick in at Rs 800 and Rs 750, based on options data. The rising interest in stock options is borne out by number of contracts traded rising from 25.87 lakh contracts on January 11, a day before TCS kicked off the Q3 results declaration season to 44 lakh contracts on January 21. The value of the options traded spurted from Rs 2 lakh crore to Rs 3.38 lakh crore over the period.