INFOSYS LAST 5 YEAR EARNINGS AND PROFITABLE OPTION STRATEGIES!

Recently, on 13^th April 2022, an IT giant Infosys Ltd. posted its Q4 March Quarter 2021-22 ended result. It had reported a consolidated profit of Rs 5,686 crore, a 12% rise against Rs 5,076 crores in the same quarter previous year. Consensus was below estimate as per several broking houses and the Infosys share price dropped significantly by 9% on NSE to Rs. 1590 in the opening market on 18^th Monday morning. Below table shows the biggest fall of Infosys shares in a single day for last 10 years.

We have collated last 5 years of Infosys earnings data and tried to analyze the Options strategies that were profitable on a consistent basis. The table below shows the date of the Infosys quarterly earnings announced for last 5 years (20 earnings sessions). We have then gathered the ATM (At-the-Money) Call and Put options data to analyze various strategies traders can deploy. 

The table below shows the end of day ATM Call & Put options price for the day before the earnings announcement. An ATM strike was identified based on the Infosys spot closing price for the day.

Similarly, the data was collected for post earnings announcement day. For example, in the first row, 13^th April was the day of result which was announced around 16:27pm. So to formulate a strategy we have to gathered closing price of ATM options on the trading day before results announcement and post result announcement to analyze the pattern.  In this case we collected data for 13^th April closing day price and 18^th April closing day price. It was a trading holiday on 14^th and 15^th April due to religious celebrations and 16^th and 17^th being Saturday and Sunday weekend off respectively.

Based on the data, few standard Strategies like Long Straddle, Short Straddle, Naked Long or Naked Short strategies were analyzed. The results for each strategy are tabulated below on a closing price basis. Only 55% of the time, the market has yield positive return with an average of 0.16% in last 5 years (20 earnings session) post earnings announcement.

Traders who deploy Long Straddle Strategies (Buying ATM Call and Put options) would make money only when the markets show significant movement on either side. In this case, there were only 3 occasions when Infosys have made significant movement of greater than 4% on the positive side while only in 1 occasion it dropped by over 7% on a closing price basis. On an average, traders would have made a loss of ₹ 8.8 if they would have deployed Long Straddle strategy for Infosys before the result announcement and squared-off post result announcement.

Similarly, Traders who deploy Short Straddle strategy (Selling ATM Call and Put options) would make money when market is not moving significantly or it remains range bound.  In this case, there were 16 occasions or 80% of the time, traders would have made money with an average profit of ₹ 8.8 per lot.

There are traders who simply would love put directional bet and they either go long or short based on their market view. For such traders, Short Call and Short Put on an average has yield ₹ 7.2 and ₹ 1.5 per lot profit respectively as opposed to Long Call and Long Put where it made an average loss of ₹7.2 and ₹1.5 respectively. The detailed analysis for each earning and its respective P&L for the given strategies is tabulated below.

Ideally, it has been observed that the price of options tends to rise nearing the earnings announcement and cools downs after the result announcement for two particular reasons:

1)  There is inflation in prices in the event of uncertainty. In options this is viewed as Implied Volatility which increases over the period up to the results announcements. Thus the price of an options as opposed to the normal trading period are bit inflated before results.

2)   Once the results are announced, the Implied volatility tends to drop and subsequently the price of an option.

Below are the Margins required on these Strategies on ICICIdirect.

Long Straddle:

For Long Straddle on Infosys ATM contract, the margin required is ₹35,040 approximately. This can be viewed using Basket order facility in F&O section of your ICICIdirect account as shown below.

Short Straddle:

For Short Straddle on Infosys ATM contracts, the margin required is 114,833 approximately as opposed to ₹174,860. This reduction in margin benefit is due to hedged position.

Naked Short Call:

For Selling one contract of Infosys ATM Call Option, margin required will be ₹97,352

Naked Short Put:

For Selling one contract of Infosys ATM Put Option, margin required will be ₹77,484

Naked Call Long:

Approximately ₹22,800 margin is required to buy an Infosys ATM Call option. For long option position, margin required is the price of an option multiplied by the quantity. 

Naked Put Long:

Approximately ₹12,300 margin is required to buy an Infosys ATM Put option. For long option position, margin required is the price of an option multiplied by the quantity.

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