In the cash market, Zee Entertainment Enterprises’ shares soared 40 per cent after the company’s largest investors, Invesco Developing Markets and OFI Global China Fund, called for an extraordinary general meeting of the company’s investors to oust current chief executive officer Punit Goenka and few other members of the board and appoint new independent directors.
On Monday, non-executive non-independent directors Manish Chokani and Ashok Kurien had handed over their resignations after Invesco’s proposal to shift them out of the board.
Invesco’s activist move spurred enthusiasm among investors that the concerns over corporate governance that had plagued the company in the recent years could now be put to bed, and it will result in a fresh start for one of India’s largest broadcasting companies.
The development was bad news for the short sellers in Zee Entertainment Enterprise, who were crushed by the short squeeze caused by the fervent buying from investors in the cash market as delivery volumes topped 33 per cent, the highest in four sessions.
In the Call options of the stock, the rapid move caused mayhem with premium on deep out-of-money Calls going through the roof, as traders looked to hurriedly buy such options expecting further run-up in the stock in the coming days.
However, for some traders this once-in-a-lifetime opportunity was missed, only because they were not adventurous enough to take a larger bet. The Rs 250 strike price Call option, expiring on September 30, became the most sought after contract in the stock’s option chain following the swashbuckling rally in the cash market.
A Call option is a contract that allows its buyer an option, not an obligation, to purchase the underlying security at a future date at pre-decided price by paying a small premium upfront.
On September 6, a trader could buy three contracts of the same Rs 250 strike price Call option of Zee Entertainment at a premium of Rs 0.3-0.55 per contract. Today, the premium of that contract closed at Rs 24.20, up a jaw-dropping 9,580 per cent.
That means, if the trader had bought the Rs 250 strike price Call option for Rs 1 lakh on September 6, she could have walked home with Rs 95.8 lakh by selling it at the end of the day. Unfortunately, for the trader, the purchase size was too small to count for any meaningful gain.
A similar phenomenon happened in the Rs 275 strike price Call option of Zee Entertainment, where a trader could buy six contracts of the strike price at a premium of Rs. 0.15-0.25 per contract a week back. Today, that Call option ended with a premium of Rs 13, up a mind-numbing 4,233 per cent.
“If someone here was trying to make big money, she would have bought this (Call option) in good quantity,” said a derivative analyst with a city-based brokerage firm.
However, the purchases made by the traders in Call options of both strike prices appear to be nothing more than a punt given the low quantities bought.
While these particular traders may have lost a chance to make big money, many others would have made plenty today as reflected in the 8,194 per cent jump in open interest in Call option of Rs 250 strike and 10,770 per cent rise in open interest in Call option of Rs 275 strike price.
The moral of the story then is that if you are going to take a wild punt, sometimes it pays to go whole hog.
