Riskless Profit Idea for Retail Investors

Infosys has announced November 1 as record date for its Rs. 13,000-crore buyback.  In this article, the returns that retails investors, and specifically, small shareholders stand to make, will be analyzed.

As per Sebi regulations, 15% of the offer is to be reserved for small shareholders holding shares upto a value of Rs. 2,00,000 as on the record date.  Thus these investors can buy shares till 27-October and below is the chart showing returns on Rs. 2,00,000.

The columns denotes the buying price for the shares.  Since there is time available till 27-October, investors can keep track of buying price and buy depending on availability of funds.  As the table denotes, lower the buying price, higher the return.

infybuyback

The returns are calculated assuming all small shareholders opt for buy back.  In that case buyback will be oversubscribed, and only part of the shares will be bought back.  At June 2017 share holding pattern of various categories of shareholders, for Small Shareholders (below Rs. 2 lakhs) the acceptance ratio works out to 59% . The remaining shares will have to be sold by the investors on their own.  The rows shows profit on selling the ~41% shares remaining after buyback basis the then ongoing price, i.e., post buy back completion.

“Buy Low and Sell High” is the mantra everyone wants to follow.  But the market offers very few opportunities for investors to actually act on such mantra.  The Infosys buyback is one such opportunity and Investors, especially, Small Shareholders need to make the most of it.

There are 2 added things that will spice up the returns.  One is the Acceptance Ratio, which is likely to be higher as not all investors have complete knowledge, time or inclination to study and subscribe for buyback.  Secondly, Infosys is likely to offer dividend along with the upcoming results on 1 November, which is likely to increase the returns.

How can FinArbitrage help


  1. If you are buying Infosys shares with the intention of benefiting from buyback, ensure that all procedures and mechanism are in place so that you can actually tender your shares in the buyback.  If you are not able to tender in the buyback, your returns will be drastically lower or even negative.  For more details please leave a comments below or Contact Us for more details.
  2. Depending on your holding period, the profit will be categorized as Long Term or Short Term.  If holding period is less than one year, then Short Term tax at your Marginal Rate will be applicable.  In order to optimize your returns and taxes, please leave a comments below or Contact Us for more details.
  3. Brokerage and applicable taxes have been factored to arrive at estimated profits in table above.  To know exact returns you are likely to make, please leave a comments below or Contact Us for more details.
  4. If value of your holdings keeps rising, and goes above Rs. 2,00,000 on Record day, then you may not be counted as Small Shareholder. Thus buy requisite quantity, monitor your holdings value, and, offload shares prior to record date as applicable.  To understand more you may Contact Us or leave comments below.

Examples of Conversion and Reversion Strategies

In one of my previous blog, I had explained about Conversion Strategy.  At FinArbitrage, we do lot of analysis on a day-to-day basis to search for executable examples of Conversion Reversion Strategies.


As on 29 November 2016, below are the available instances of such strategies.


Points of Caution

  1. These strategies are arbitrage strategies, and as such gets snatched as soon as available.  There are many human as well as automated programs being run by specialized investment desk in search of these strategies.
  2. It is paramount that all the multiple legs of a particular strategy be executed in one go.  Only if all legs are available at an instance, the particular instance of these Conversion or Reversion needs to be entered into.  Thus no leg of the strategy can be entered into in isolation.
  3. Once a particular strategy is executed, it needs to be kept intact till expiry so as to realize the planned gain.  Thus available margin on an ongoing basis need to be monitored and any additional margin as required will have to be made available.

 

Options Conversion Strategy

A Conversion is an arbitrage strategy in options trading that can be performed when options are overpriced relative to the underlying stock.  This strategy falls in the arbitrage category; thus, if it is executed well then you can get riskless profit.

In this post I will explain with example how this strategy can be carried out.  More examples of Conversion strategies are on this page.  To do a conversion, the trader buys the underlying stock and offset it with an equivalent synthetic short stock (long put + short call) position.  The underlying stock in this case will be under priced, or, will be at price less than the synthetic short.


The Underlying

On 22 Nov 2016, Marico was trading at 251.55.  Refer below screenshot for details.  Also note the price for the 260 call and put options.

conversion1


Strategy Positions

To implement the strategy, 260 call option is sold for 1.2.  Put option is bought at 7.75 and the stock is bought at 251.55.  Picture below shows more details about the quantity which depends on lot size, Margin, and other details.

conversion2

Strategy Performance

The graph below depicts how this strategy will fare for different closing price of the underlying on expiry.  You will notice that irrespective of the value of the underlying, at expiry the strategy gives a positive return.

conversion3

Strategy Summary

The strategy provides a return of 1.12% on the Total Investment

conversion4

Given that the investments are generally over shorter horizon, the annualized returns are greater.  In this case the 1 Month return is 17.22%.  This is further amplified in case the strategy is executed nearer to expiry.

Computational Investing

Computational Investing Course on Coursera is a good one for beginners. You will learn how to get started creating algorithms that hedge funds and investment professionals use. You will also learn how to develop the platform for machine learning models in python to solve real life Equity investing problems.

Go to this URL to check out this course.  Do review this course and put your feedback in the comments.