Zee’S Options, Airtel Rights, Sucker Bulk Deal, Promoters’ arbitration

Famous fund manager Peter Lynch noted that more people lost money waiting for a market correction than being in the middle of it. This seems to be quite the case right now on Dalal Street. Foreigners rubbed their hands in glee as the market suddenly plunged on Wednesday, convinced that the long-awaited correction had finally arrived. But the insiders, as always, seem to have had the final say at the end of the week. The buy-down strategy is working wonderfully… so far.

Discount offer

Bharti Airtel (RE) rights to equity shares saw strong action during the week. RE is the rights issued by the company to existing shareholders to subscribe to the new shares; shareholders can renounce it in whole or in part. Interestingly, on Tuesday a big block of ER changed hands on BSE with a steep discount from the price of ESN at that time. Seconds after trading started, there were only buyers of Airtel RE at Rs 204.50 on the NSE.
But on BSE, a large block changed hands at Rs 151. And the weighted average price on BSE for that day was Rs 153, indicating that the block size was significant. Traders watching the screen were surprised that someone wanted to sell at a low price as demand skyrocketed. Something similar was seen when the rights were issued for Vodafone Idea in 2019, and many buyers were unhappy that they could not get the REs despite a higher bid.
Market watchers say SEBI should also have a pre-market price discovery mechanism for REs, as it does for new listings.

Call it correctly

As promoters of Zee and Invesco clash in court, the bulls in the stock appear to have pulled out for the time being. Zee is seen as a potential revaluation game by many, but potential buyers are awaiting clarification on who will ultimately take the reins of the business. As for the probable evolution of the stock in the short term, monitoring options contracts could offer clues. In the week leading up to Invesco’s letter to Zee’s board of directors requesting a change in the management of the company, there was a sudden wave of out-of-the-money call option purchases ( strike price of 200).

Nice leap of faith from buyers, considering that the title had been declining for more than three months. Sellers of these options looking for assured gains would have been crushed as the option price rose from around Rs 3 to Rs 64 overnight as soon as Invesco’s letter went public, and the stock shot up. about 40% in one session. Did buyers know something that the rest of the market didn’t know?

Wholesale sucker

Traders in mid-cap stocks would gradually be offloading positions in some of the vulnerable names. With valuations becoming increasingly difficult to justify, many mid-caps will become illiquid overnight as soon as a correction occurs. So smart gamers are using the current frenzy to make a quiet outing, ironically, making noise about it. The modus operandi is as follows: put a big block of shares to sell on the screen. This will make the bulls nervous.

But soon enough, another buyer (an associate) will take over. Newbies watching the trading screen will mistake this for a sign of high demand for the stock. The next time a block is offered, like mice attracted to cheese, they nibble on it, only to realize that there is more where it comes from.

Many of these new entrants act in groups as it helps them build momentum in small stocks. They are confident that they have learned everything there is on the market. But as the old monk says: new investors will soon learn very old lessons from the market.

VL kicker

With money flowing in at a rapid pace, many fund managers don’t know how to deploy them, given the expensive valuations. But not investing is an even greater risk in this kind of market.

Some of the smart fund managers are using new inflows to increase their exposure to stocks that have a heavy weight in their portfolios. If the share is medium in size, the purchase increases the share price as well as the net asset value (NAV) of the plan. A higher NAV means more investors show up at the door.

Bank in Canara

Rakesh Jhunjhunwala’s purchase of Canara Bank shares last month is common knowledge as this is reflected in the bank’s latest shareholder data. But the action also seems to have caught the attention of Silent Operator and his associates, who have regularly bought it over the past month.

The mood of public sector banks, in general, has improved, with analysts expecting a significant drop in the proportion of non-performing assets for the September quarter. But beware of jumping into any title just because the big names in the market made it shine. Too many cooks can spoil the broth.

Money for jam

The rise of arbitrage funds is a blessing for the promoters of many mid-cap companies who regularly venture into their own stocks. Arbitrage funds sell futures contracts on stocks – which are quoted at a slight premium over the spot price – and buy an equivalent number of underlying stocks. This difference between the futures and spot market prices is the fund’s profit from the transaction.

At expiration, positions are reversed: futures are bought and stocks are sold. It turns out that some promoters are selling shares of their benami accounts with these funds and, through their brokers, take a long position in futures contracts, equivalent to the shares sold.

On the other side of futures trading is the arbitrage fund. The promoter gets the full amount of shares sold and only needs to pay 25% for the futures position. At maturity, the promoter and the fund agree to carry over their positions to the next settlement cycle.

The fund gets its spread, the promoter gets its funds.

(Edited by : Ajay Vaishnav)

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