Retail option sellers burn fingers as tech results surprise
Wipro Ltd and HCL Technologies Ltd, which released earnings after market hours on Friday, are expected to open higher on Monday. Sellers of call options took up the huge bets on expectations that information technology (IT) companies’ earnings would disappoint and their share prices would correct. But the results came out better than expected, and the stocks were rewarded by the markets.
Interestingly, both foreign and domestic institutions as well as proprietary traders have also sold call options, but these are against actual physical holdings; so, their losses in options would be offset by the gains in their stock holdings, said Kruti Shah, a quant analyst at Equirus Securities. “Retail tends to punt before results and they do it through options," Shah said. “Since most of these bets are naked (without underlying shares), they would bear the brunt of the gap-up the most." The pain felt by retail investors solely punting on the results is borne by the Infosys 1500 call option contract expiring on 25 January.
On 11 January, the option had an open or outstanding position —a measure of money flowing into the market—of 2,754,000 shares, while the price of the contract was ₹57 a share. As the company posted results after market hours on Thursday, the sellers could close out their contracts only the next day, by which time its price had more than doubled to close at ₹121 apiece. The open position plunged to 1,593,000 shares the next day.
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