Irctc bulls crash, savvy Tata Motors traders’ call ‘correctly, brokers’ Lap’Dance


“Bullet train becomes a train on fire” was one of the memes that took to social media and Whatsapp groups last Tuesday as IRCTC shares crashed 15% within minutes. There were two rumors going around during the frantic trading in the last 45 minutes. One was that the government was planning to appoint a regulator for the rail industry. Since most of the bulls were sitting in leveraged positions, they panicked, unaware that the concept of a rail regulator had been in the works for over four years now. Not that such awareness would have made a difference in the face of a margin call.

The other gossip was that the stock was likely to return to NSE’s futures and options ban list. This would have triggered some liquidation of long futures contracts. Because when a security is put on the blacklist, new derivative positions are prohibited and only existing positions can be reversed.

It is said on the street that the wave of selling stocks was programmed in such a way that it would surprise weaker bulls and force them to unwind their positions.

Many bulls are still holding onto their positions in equities as well as derivatives, hoping for a better exit price by the F&O expiration on Thursday.

Interestingly, there was a huge demand for unusual 4500, 4600 and 4700 strike price puts a few days before the liquidation. Buyers of put options are betting on a fall in price, while those on the other side of the trade are convinced that the price will not fall as much.

On October 19, before the stock collapsed, there was massive call options activity for 6,500 call options. The demand for call options was not surprising, given the stock’s sustained rise and the positive chatter that had surrounded it so far. But it would take courage and deep pockets to write call options for a title with so much momentum behind it. In other words, those who have written the call options are confident that the price will not exceed 6,500.

If it is smart money on the right side of those options trades (put option buyers and call option sellers) then IRCTC stock may have peaked for the moment.

Options: The new action center

Options trading has become a big hit with Indian Robinhood traders, many of whom have easily made a lot of money over the past year due to the almost one-sided market rally. Many young entrants to the stock market have chosen derivatives trading as their entry point, after taking intensive courses in futures and options. Having limited capital, but keen to participate in the stock market action, these players see derivatives trading as the way to make big profits in the shortest possible time, with minimal risk.

The average daily turnover of stock options has almost quintupled to almost Rs 6,000 crore in the past 18 months. Activity in equity futures has also increased as traders try to hedge their options through futures positions. As a result, equity futures and stock options now account for around 66% of average daily revenue in the derivatives segment, up from around 52% before the pandemic.

But the flip side of this trend is that many of these newbie players are becoming easy prey for the cunning old timers, who now make most of their trading profits through options. The modus operandi is to buy or sell options out of the money and then change the share price in concert with the portfolio managers who will buy or sell large blocks of shares.

“Call” correctly

Tata Motors and Tata Power shares posted massive single-day gains earlier this month. The announcement of TPG’s investment in the electric vehicle arm of Tata Motors would have come as a surprise to most, but some well-networked traders seem to have gotten a whiff of it, judging by the constant buying of options in the market. ‘buy out of the money from 400 strikes in the last week of September itself. This, even as the stock was stuck in a range between Rs 300 and Rs 330. Calls, which went for less than Rs 10 during the first week of October, peaked at Rs 122 on the day. where TPG’s investment was announced.
Massive buying of options to call a stock can be self-fulfilling, as more and more buyers enter the fray anticipating a big rally in the stock. Call option sellers attempt to hedge their position by going long in futures contracts or buying the stock. All of this has the effect of driving up stock prices and becomes a case of a tail wagging the dog. Last year, in September, SoftBank reportedly sparked a huge rally in frontline tech stocks on the Nasdaq by taking outsized bets on options to call those stocks.

All of this indicates that to get a sense of where a stock might go, keep a close eye on options contract activity.

Broker-NBFC ‘lap’dance

Smart brokers have run a workaround for their favorite clients on the SEBI rule on 100 percent margin payment. Prior to this rule, brokers regularly funded their clients’ margin requirements in exchange for interest charges. Since this is no longer allowed, brokers have found other ways to fund their high volume clients. The gossip is that NBFCs owned by brokers or that have close ties to brokerage firms finance clients under the guise of Loans Against Property (LAP). Since many big-money traders also have large investments in real estate, they are able to provide collateral for such an arrangement.
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(Edited by : Ajay Vaishnav)

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