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

The Economic Times - - Markets + Finance - PALAK SHAH

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.

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