Nathan Rothschild famously said in the 19th century that the time to buy is when there's "blood in the streets." That's what traders did yesterday in a tech giant that's fallen on hard times.
Readers may note that there is a lot to like in this stock. The company has twice as many employees as Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT). Its top-line is heftier than peers like Salesforce.com (NASDAQ: CRM) and Adobe Systems (NASDAQ: ADBE). Some of the world's biggest banks and institutions rank among its customers. It's even a member of the high-flying emerging markets category that's running roughshod over domestic equities this year.
Of late, however, none of that has done much to help Infosys (NYSE: INFY). The Indian software colossus struggled since 2010 amid concerns about a changing business landscape, rising costs, and–most recently–potentially tighter U.S. immigration policies. Matters went from bad to worse in the eyes of many investors on Friday when CEO Vishal Sikka unexpectedly jumped ship and left its squabbling founders holding the bag.1 Yesterday, brokerages from New York to Mumbai piled on with downgrades and price-target cuts.2
But options players saw opportunity in the ensuing crisis. Buyers went to work shortly after Monday's opening bell, trading the September 14 calls for $0.45. They kept going as premiums rose to $0.60, $0.65 and $0.70, churning more than 1,500 contracts by lunch. It was followed by a block of 2,000 April 14 puts for $1. Both calls and puts hitting the tape? How can that be bullish? Well, they bought one and sold the other.
Calls, after all, fix the price where a security can be purchased. They make money when shares rise, yet can dwindle if a big enough move doesn't occur. The September contracts, for instance, will roughly double from INFY climbing barely 3 percent to $15 by expiration. They'll break even at $14.50 but will go worthless from a dip below $14.
Source: OptionsHouse by E*TRADE
What about the April 14 puts? How can those be positive for the stock? Buying puts is generally bearish because they fix the price where investors can sell a stock. But just the opposite is true when they're sold, as happened Monday. In that case, it creates an obligation to buy shares to buy shares for $14 and reflects a conviction the shares will stay above that level. In return, they keep the $1 premium. Somewhat similar to accepting insurance payments on a house you don't expect to burn down.
INFY slid 1.56 percent to $14.48 yesterday. Combined with Friday's carnage, it's in the midst of its worst two-day showing in over a year. The company also remains slightly negative since 2017 began, orphaned on the sidelines as other Indian stocks like Cognizant Technology (NASDAQ: CTSH) and ICICI Bank (NYSE: IBN) chalk up double-digit gains.
Despite uncertainty in the corner office, members of the glass-half full crowd have seen green shoots of a turnaround as artificial intelligence and automation are embraced.3 The company also beefed up a buyback authorization to defend its share price.4
Bottom line: INFY has taken a beating in the last two sessions but some traders saw an opportunity yesterday.
1. Marketwatch: Infosys CEO resigns, citing resistance to change. 8/18/17. Reuters: Infosys CEO resigns after long-running feud with founders. 8/17/17.
2. Financial Express (India): Leading brokerages JP Morgan, Edelweiss, CLSA downgrade Infosys after Vishal Sikka’s exit. 8/21/17.
3. Bank of America Merrill Lynch: Recent step-up in artificial intelligence and automation capabilities. 6/1/17.
4. Reuters: Infosys shares extend losses as leadership issues outweigh share buyback. 8/20/17.