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CM Strategy

Optionalysis: Despite Infy's 3.8% Fall, Put Option Holders Lose Money [A Follow Up]

Optionalysis

We promised a follow up to our earlier post on the Infosys Option Move. The stock did move a lot today!

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Result Impact 

The stock fell 3.81%, which sounds like a large number but it didn’t save the option buyers at all.

Option Straddle Buyers Lost Money!

We spoke of how the 1160 straddle was priced at 104 on Friday. This was an implied volatility of 51%. Today, at the open, the implied volatility collapsed. And even if you owned a straddle, you lost 25% in the day, even as the stock continued to fall! The Straddle closed the day at Rs. 75. (60 on the Put, 15 on the call).

Straddle

(Note: we are building this tool for Capital Mind Snap. You’ll be able to plot Straddles and Strangles online, in a 15 minute delayed chart!)

In one trading day:

• If you were long a straddle, you lost 25% even though Infy fell 3.8%

• If you were short a straddle, you made about 8% on your margin – since you would have invested approximately Rs. 75,000 per straddle lot of 250 shares, and made about Rs. 6250. (Returns for short options are different from long options because of the higher margins required on the short side)

Even Being Long Puts Was Loss Making

In any other circumstance, a long put option would make money if the stock fell 3.8% and there were more than two weeks left to expiry. (I.E. Lot of time value)

But when the implied volatility collapsed to 39% from 50%, you can see how even being long put options saw losses!

Puts

Even the 1120 put went up only Rs. 2. And below 1100, all Infy puts lost money today!

The point is:

• In long options you can’t just be right on the direction

• You have to get the intensity of the move (how much) right too

• And sometimes, like today, you could have been spot on about Infy’s move and still lost money on options, because the options required a bigger move.

Notes on Infy:

Infy had good results – a 10% growth in profits YoY, and some smart revenue growth too. Much of this is because the USD has strengthened. They have attempted to make higher margins – by increasing utilization, a turn in the profit per employee, and a smart change in fixed price projects to the highest in the recent past.

On the downside, their CFO resigned giving no reasons. This leaves a lot of questions which has perhaps caused some level of concern, but not very much. Also, their guidance is muted, for a weak second half.

We’ve analyzed the results in charts in this note.

Technically, we see weakness in the stock. That last candle is scary, and is a “bearish engulfing” candle. It’s also showing an MACD Bearish Cross. Not looking very good.

Infy Chart

But don’t buy puts just yet – at 39% IV they are still too expensive!

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion. 

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

Next Gen Financial Analytics

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