Infosys Shock Sparks 9,400% Rally in Near-Worthless Options

May 29, 2014 6:31 am ET

(Updates with analyst comment in eighth paragraph.)

May 29 (Bloomberg) -- To get a sense how surprised investors are by the departure of Infosys Ltd. co-president B.G. Srinivas, take a look at the options market.

Yesterday’s most-widely held put options on Infosys, those that expire today and become profitable if shares fall below 3,100 rupees, surged 17-fold as of 3:30 p.m. close in Mumbai. Bearish contracts with a strike of 3,000, which tumbled 88 percent yesterday to just 0.8 rupee, rallied as much as 9,400 percent in Mumbai. The stock sank 6.5 percent to 2,924.5 rupees.

While swings in options prices often increase as they near expiry, the size of today’s moves suggests investors were blindsided by the departure of Srinivas, who oversaw units at the software-services provider catering to insurance, manufacturing and financial-services companies. The exit is a “major shock” as Srinivas was a potential candidate for chief executive officer, wrote Maybank Kim Eng analyst Urmil Shah.

“We are surprised,” Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Plc, which oversees about $541 billion, said in an interview on Bloomberg TV India. The “leadership issue for us is the most important one, who the front bench of leadership will be, and we are not totally clear on that. That needs to stabilize.”

Srinivas is at least the 10th senior executive to leave the Bengaluru-based company since founder N.R. Narayana Murthy returned as chairman in June. Chief Financial Officer V. Balakrishnan, who presided over a fourfold increase in net income over his six-year tenure, left in December, and Americas head Ashok Vemuri left in August to become CEO of rival Igate Corp. Infosys is searching for a new CEO to replace retiring co- founder S.D. Shibulal.

Sales Outlook

Infosys forecast April 15 that full-year sales will climb 7 percent to 9 percent in U.S. dollar terms, versus the 6 percent to 8.3 percent average of six analyst estimates compiled by Bloomberg. It posted a 25 percent jump in fourth-quarter profit.

The shares tumbled to the lowest level since July 29, the worst performance on the benchmark S&P BSE Sensex index and the second-biggest losers in the MSCI Emerging Markets Index.

“Infosys shares could sustain at current levels,” B. Gopkumar, executive vice president at Kotak Securities Ltd. in Mumbai, said by phone.“Yesterday’s exit will not materially change the company’s earnings.”

The 3,000 puts were the eighth most-active contract on Infosys. Calls with a strike of 3,000, which tumbled 99.96 percent today, had the highest volume, data compiled by Bloomberg show. Puts give the right to sell a security, while calls convey the right to buy.

“I’d have loved to have gone home yesterday buying Infosys puts,” Manoj Vayalar, an assistant vice president at Religare Securities Ltd., said in a phone interview. “All options sellers have been caught on the wrong foot today.”

--With assistance from Adi Narayan and Ameya Karve in Mumbai.