Retail option sellers burn fingers as tech results surprise

Retail traders who took huge punts ahead of the tech pack results are in for serious trouble if they don’t hold the underlying stocks, market analysts said. Shares of Infosys Ltd and Tata Consultancy Services Ltd (TCS) shot up on Friday after they posted better than expected third quarter results the previous day, while 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. The Infosys stock closed up 7.9% at 1,612.75 on the National Stock Exchange (NSE) on Friday, tracking the overnight surge of its American depository receipts (ADRs) listed on Nasdaq. On TCS, which also posted Q3 earnings after market hours on Thursday, the 3700 call contract closed at 97.55 a share.

However, when the markets opened next day, the option almost doubled to 181 a share, causing a huge loss to call sellers, which was evident in the open position falling to 332,000 shares on Friday from 570,000 shares a day earlier. The share itself jumped 3.9% to 3,882.80. “Retail call writers without underlying shares have lost their shirts in both Infy and TCS, and the same could repeat in Wipro and HCL Technologies," said Chandan Taparia, senior vice president, derivatives and technicals research, .

Wipro closed up 3.8% at 465.45 on NSE on Friday, but its ADR traded on Nasdaq jumped 16.95% to $6.28. This means on Monday, the 470 480 call options would surge, leaving the seller high and dry. HCL Tech, which rose 3.7% to 1,540.80, could also see the writers at 1550 and 1600 levels scurry for cover, according to Equirus’ Shah.

Foreign portfolio investors purchased a modest 7,176 crore worth of tech stocks from mid November to 31 December ahead of the Q3 earnings, according to National Securities Depository Ltd data. Taparia expects their buying to intensify after the earnings reports. While the life of the IT rally is uncertain, market mavens said the futures segment indicator points to short covering in Wipro and a long build up in Infosys, TCS and HCL Tech after their earnings.

However, the very reason of the shorts in the futures segment holding their position indicates that the rally could falter in the near term ..