Infosys shock sparks 8,500% rally in near-worthless put options2 min read . Updated: 29 May 2014, 01:51 PM IST
To get a sense how surprised investors are by departure of Infosys co-president BG Srinivas, take a look at the options market
Wednesday’s most-widely held put options on Infosys, those that expire on Thursday and become profitable if shares fall below ₹ 3,100, surged 15-fold as of 12:08pm in Mumbai. Bearish contracts with a strike price of ₹ 3,000, which tumbled 88% on Wednesday to just ₹ 0.8, rallied as much as 8,519% on Thursday. The stock sank 5.8% to ₹ 2,945.
While swings in options prices often increase as they near expiry, the size of Thursday’s moves suggests investors were blindsided by the departure of Srinivas, who oversaw units at the software-services provider catering to insurance, manufacturing and financial-services companies. The exit is a major shock as Srinivas was a potential candidate for chief executive officer, wrote Maybank Kim Eng analyst Urmil Shah.
“We are surprised," Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Plc, which oversees about $541 billion, said in an interview on Bloomberg TV India. “The leadership issue for us is the most important one, who the front bench of leadership will be, and we are not totally clear on that. That needs to stabilize."
Srinivas is at least the 10th senior executive to leave the company since founder N.R. Narayana Murthy returned as chairman in June. Chief financial officer V. Balakrishnan, who presided over a fourfold increase in net income over his six-year tenure, left in December, and Americas head Ashok Vemuri left in August to become CEO of rival iGate Corp. Infosys is searching for a new CEO to replace retiring co-founder S.D. Shibulal.
Infosys forecast on 15 April that full-year sales will climb 7% to 9% in US dollar terms, versus the 6% to 8.3% average of six analyst estimates compiled by Bloomberg. It posted a 25% jump in fourth-quarter profit.
Infosys shares fell on Thursday to the lowest level since 29 July and were the biggest losers in the MSCI Emerging Markets Index. The ₹ 3,000 puts were the eighth most-active contract on Infosys. Calls with a strike price of ₹ 3,000, which tumbled 96% on Thursday, had the highest volume, according to data compiled by Bloomberg. Puts give the right to sell a security, while calls convey the right to buy.
“I’d have loved to have gone home on Wednesday buying Infosys puts," Manoj Vayalar, an assistant vice president at Religare Securities Ltd, said in a phone interview. “All options sellers have been caught on the wrong foot today (on Thursday)." Bloomberg