Infosys Q1: Straddle, strangle option trades prove futile

Riken Mehta
moneycontrol.com

Shares of Infosys surged more than 12 percent in the opening bell after the former IT bellwether beat street expectations with its first quarterly earnings. Infy's net profit fell lower-than-expected by 0.8 percent at Rs 2,374 crore compared to the previous quarter. Rupee revenue also jumped 7.8 percent to Rs 11,267 crore from Rs 10,454 crore.

Analysts on an average were expecting net profit at Rs 2,315 crore on revenue of Rs 11,029 crore for the quarter.

The volatility in Infosys stock options hit a five-year high on Thursday as bulls and bears were anticipating big moves on either side. CNBC-TV18’s Anuj Singhal reported that implied volatility in the Infosys stock options had jumped to 90 percent compared to the historical volatility of 66 percent. The options were heavily overpriced ahead of the results and extreme movement in Infosys only would have made straddle/strangle strategy profitable. In the last 12 quarters (July 2010-April 2013) Infosys closed only twice in the green.

Long straddle strategy involved buying an Infosys 2500 call and put of the same strike price. At closing price on Thursday the net investment would have been Rs 342. At 9.35 am, Infy 2500 call was trading at Rs 335 while Infy 2500 Put was trading at Rs 5. At this price, long or short straddle strategy will make no money for traders.

Long strangle involved buying out of money options. Infosys 2600 Call closed at Rs 145 while 2400 Put closed at Rs 116.7. Net investment turns out to be Rs 262.2. On Friday morning, Infy 2600 call was trading at Rs 241 while Infy 2400 Put was trading at Rs 3.75. At this price, Strangle strategy will be loss-making for traders. Straddle strategy of Infy 2700 call and 2300 Put would also have resulted in loss.

Overall, the traders would have made little money in these strategies if they would have booked profits in the first five minutes of opening bell. For rest, it would have been neutral or loss making.