It’s Finally Here!!

The long going debate on LTCG finally came to an end on Thursday, with the Finance Minister declaring the introduction of LTCG at 10% on all equity related instruments. There was some relaxation in the form of 1 lakh of amount as exemption and grandfathering from 31^st Jan 2018. This did give comfort to the participants early on but the reaction on Friday probably says it all.

The budget also did not have much in store for corporate India. So, the double whammy spooked the market on Friday, which registered one the sharpest falls in last one year. Are the Indian markets ready for such a tax regime or not is for the time to tell, but clearly we are the only emerging market to do this. As for the incumbent government they are now known to take the country with a surprise and come up with such unique things.

As for me last for last few days have been quite interesting, while the broader market index has been flat the slow downmove in Mid Cap and specially the Small Cap index was clearly bringing discomfort. The small cap index had already corrected 10% from its peak before the carnage on Friday. While there have been talks about realignment by mutual funds from mid cap and small cap to large cap, a 10% in the dip would not be the modus operandi. The upmove in the broader market also has been quite polarized. So, pre budget I was staying light on my trades.

That’s when an interesting data point came up. ICICI Bank pre result was witnessing some heavy Put action at 330 strike, while it was trading at near 350 levels in spot market. The open positions on the day of the results was close to a 1 crore shares. This means a notional exposure of nearly 330 crores. No other Call or Put strike was near that level in terms on open interest. Surely, something was not right. If it’s a buyer who was leading the trade then, there would some negative news in offing. While if the seller was the one leading it could be probably some big buying which was waiting for price to correct till 330. The lower IVs indicated more of selling pressure. Either ways, the current price would see difficulty in sustenance.

So, with that in mind I created a 350 – 330 Put spread at ~Inr 6/-. The results came in post markets. Surprisingly there was nothing significantly negative in the results. Next day the stock opened flattish and traded with slight negative bias. With a spread position and slight negative bias in price I decided to hold on. As such it was a big day, with budget around. The stock ended weak post the budget speech and closed below 350 levels.

Next day was the big one as the aftermath of the budget started. The stock slide down to near 335 levels on closing and spread is now worth near Inr 11/- levels. The downmove was lead by budget disappointment or some stock specific issue is not known, but some position out there in the market pinpointed early on that the price is set to correct.

Options provide this unique opportunity where one can participate on the most uncertain day with restricted losses. Also, many a times such trades are born out of derivatives data itself. It’s more so a self sustaining model in itself.

Happy Trading

Cheers!!