Dead cat bounce and my dream company: Reliance Communications

Dead cat bounce is an Investor slang, which talks about brief recovery in the price of a falling stock. Small amount of good news might lead to such bounce-back in dead stocks.

MTNL, Punj Lloyd, ADAG stocks are some examples of dead cat stocks in the Indian market. RCom is one among them and my dream company to trade as option writer. Implied Volatility’s (IV’s) always remain high in the range of 70-75% and spike up substantially in case of any adverse news-flow. Option premium always remain high due to high IV’s. Last week, a day before court rejected petition to include Mr. Anil Ambani in the charge sheet filed by CBI, IV’s in RCom puts spiked up sharply. Spot price was 90 and puts  as low as 50 level were open for trading. I looked at 90 call and 90 put, both were trading at Rs.6 odd. It was quite clear to me that the market did not have  any indication what so ever on the verdict. I went ahead and sold 60, 65 and 70 puts. Even if  the verdict was against him, stock tanked 10-15% next day, I doubt if it would have closed June series at those levels. Puts which I wrote were 30-40% away from spot level. Since the verdict went in favor of  Mr. Ambani, puts premium tanked 70-80% next day. My returns from 70 puts were 13.43% in 29 days. There is news about RCom selling its stake in tower company, in case it happens RCom is due for dead cat bounce. Given the levels of debt RCom has on its books, tower sale is extremely crucial for them.


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June 2011
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