Unusual Trades in Dec Series Nifty Options Under Sebi Lens
Regulator checking if the trades on May 7 at option strikes way above Nifty levels were pre-negotiated
Securities and Exchange Board of India is looking into certain unusual trades in Nifty options contracts executed last week. The transactions have come under the capital market regulator's lens as they happened at option strikes that were way above the Nifty levels then. Sebi is checking if these were pre-negotiated deals and has asked for the identity of the buyer and sellers of the contracts. This is because similar trades were done by a Mumbaibased broking firm, which was soon declared a defaulter. On May 7, Nifty call options worth .` 120 crore were transacted at 7900 strike expiring in December. The position build-up happened when the Nifty was at 6650. Usually, most of the activity in Nifty options is seen at strikes that are 300-400 points on either sides of the index. Also, traders prefer to build positions in the current month contracts, which are most liquid. The December series of Nifty op- tions has seen a huge build-up of call options at 7900 and 8000 strike prices. The combined open interest (OI) of contracts at both these strike prices stood at over 66 lakh and they are worth over .` 120 crore as on Wednesday’s closing premium. The OI in 8500 call options for the same month is over .` 3 crore. What caught Sebi’s attention was the pattern in which these positions were built, said two sources close to the development in Sebi. For instance, the build-up of positions in Nifty call options of 7900 strike price was done in a single trading session on May 7 through nine block deals. About 5.33-lakh units of Nifty 7900 December call changed hands via three block deals at a premium of .` 88.33 per options, while 15.2-lakh units were transacted through six blocks at around the same price. The regulator had stumbled upon instances in the past when operators used this route for money-laundering.
“A foreign institutional investor, who has received money abroad will just buy these options in India to pass on the funds via a legitimate route and the seller of these options gets his funds in white,” said a legal expert aware of the working of Sebi. “The seller of the options may not have to deliver or buy back any share. The buyer will keep his cut from the money received abroad and purchase options of the remaining money. It is a risk-free trade for the seller as in any practical circumstances the markets may not rise to such a level and even if it does, there is enough time to square off.” Long-dated and deep out-of-the money index options are easy to manipulate as there is not much trading interest and volumes in these counters. The last time such a build-up of long-dated positions was noticed in Nifty was in 2013. It came to light that a large number of positions belonged to a Mumbai-based broker who was later declared a defaulter. The risk in such trades is that the buyer of these options now may not be able to sell them if the markets correct from the current level.