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THERE’S never a dearth of conspiracy theories in financial markets, particularly in times of big events like the current open offer in Ranbaxy. With Daiichi’s open offer extending into September, Ranbaxy derivative contracts — expiring in September — have suddenly become unusually active, given that we have around 15 sessions of even the August series to go. September futures of Ranbaxy are trading at nearly Rs 400, a discount of over Rs 100 to spot, indicating that the stock is likely to trade around that level once the open offer is through. But what has baffled many market watchers is the increased activity in the 400 September call, which ended at Rs 106.40 on Thursday. The obvious question being, “Why would any one pay such a hefty premium for it, when the market has all but concluded that Ranbaxy would trade around Rs 400, post the open offer?”
And given that traders are still buying it, will they try and jack up the price in the cash segment sometime between the tendering of shares and their acceptance? The answer to these concerns is simple. Since, equity options in India are American and not European (like index options), they can never trade below their intrinsic values (the difference between the spot price and the strike price in case of a call and the reverse in case of a put). As a result, Ranbaxy 400 September call options got to trade above its intrinsic value of Rs 103.50, given that Ranbaxy ended the day in the cash segment at Rs 503.50. So, both the buyer and the seller of the call are simply using this as a surrogate to the cash segment, given that the break-even for both the buyer and the seller is very close to the cash market price of Ranbaxy, and given that its price is unlikely to move much till the open offer. Therefore, the buyer is likely to scoot any moment and probably has no intention of holding this call till its scheduled expiry — much to the dismay of the call writer, who thinks he/she has a free bearer cheque. So, don’t be surprised if the entire open interest in the Ranbaxy 400 September call option is unwound much before the expiry of the September series — much to the dismay of conspiracy theorists.


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