Reliance Short Sellers Caught In A Bear Squeeze

The Mukesh Ambani-controlled company has offered up to 40% stake in Reliance Retail Ventures Ltd. to Amazon.com Inc., Bloomberg reported citing unnamed people aware of the details. If successful, this will be its biggest-ever deal in India.

Reliance Industries shares jumped as much as 8.5% after the report, and it helped benchmark Nifty 50 close 1.5% higher. The stock closed 7% higher at Rs 2,314 apiece on the NSE, making Reliance India’s first company to cross market capitalisation of $200 billion.

Trading volumes in Reliance shares had already increased in the last few days amid reports of Ambani starting to replicate the fundraising blitz seen at Jio Platforms Ltd. in the retail unit as well.

At 11:40 a.m. on Thursday, volumes and the stock price started rising compared with 10-day average.

• 6.47 crore shares were traded on the NSE, accounting for 37.6% of the Nifty 50 traded .
• Reliance’s traded turnover of Rs 14,734 crore accounted for nearly 25% of the NSE’s market turnover.
• Reliance volumes accounted of 9.5% of the total Nifty 50 shares traded.

Speculation

The trading in Reliance Industries was driven by speculation as only 18.8% of the shares were marked for delivery. That compares 29.28% average delivery in the last 10 days and 22.9% in the last one month.

What that suggests is a large chunk of the trading today was due to a short squeeze. This happens when traders betting against the stock going higher take a short position. A sudden jump in the stock prices forces such short sellers to close their positions to cut losses.

In case of Reliance, that happened as the stock breached the Rs 2,200 resistance level.

Derivatives

Trading in the derivative segment also points to a short squeeze. Short sellers borrow securities to sell anticipating that prices will fall, and then buy at a lower level to square off positions.

Traders with short positions in the futures buy futures to cover their positions, and those who have written or sold call options will buy call options to close their positions.

• The total of trade in Reliance’s September futures stood at Rs 18,388 crore in the most active contract, according to NSE data.
• At the end of the trading day, Reliance saw unwinding of positions as open interest or outstanding shares fell more than 1.17 lakh units.

This decline indicates unwinding of the short positions by traders as the stock jumped.

This is corroborated by trading in the Reliance 2200 September call options. Reliance had maximum call open interest in this contract, indicating that writers didn’t expect the stock to go above this level.

When the stock did go above this level:

• Open interest fell by 16.8 lakh units and saw a premium turnover of Rs 185 crore, higher than usual.
• Overall, Reliance call options saw an 18.8% decline in open interest at the end Thursday.

The call premiums also spiked.

• Premiums were hovering between Rs 31 and Rs 59 since the beginning of the week.
• The premium that stood at Rs 64 at the start of trade on Thursday jumped to a high of 172 before cooling off to close at 147.90.

Which means, call writers looking to close their positions had to buy at a higher premium to cut losses as stock moved past Rs 2,200 and then Rs 2,300 apiece.

The open interest is now getting concentrated at 2400 call in the September contract.