Adani Group Share Clues Can Be Seen in Surging Options Market

(Bloomberg) — The selloff in Adani Group shares is stretching into a third week despite efforts to stem contagion, spurring a flurry of bets in option markets that may give traders clues on how long the declines will last.

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Six of the group’s 10 stocks slid Monday, increasing losses since US short-seller Hindenburg Research made fraud allegations against the conglomerate on Jan. 24 to about $117 billion. Billionaire Gautam Adani and his family have prepaid $1.11 billion of borrowings backed by shares to ease investor concerns, the group said in a statement Monday.

The following four charts show how the options market is positioned and presents some price levels likely to guide investors on the tactical outlook for the group’s shares:

1. Option ‘Walls’

Shares in flagship Adani Enterprises Ltd. have tumbled about 50% since Hindenburg published its short-selling report on Jan. 24, the steepest decline of the four stocks in the group that have underlying derivatives. Still, they have bounced back from their intraday low of about 1,017 rupees set on Friday.

Friday’s low is notable as it lies between the levels of 1,000 and 1,100, where there’s the highest concentration of put options expiring in February, based on data compiled by Bloomberg. Should the stock drop below that, the selling pressure may increase.

Similarly, the top of the current trading range looks to be between 2,500 and 3,000 where there’s the greatest cluster of call options, which indicates investors are positioned to buy around those levels if the stock rallies beyond the strikes, the data compiled by Bloomberg show.

The puts and calls expire Feb. 23, setting the stage for a tussle in about two weeks’ time.

2. Put-Call Ratio

The ratio of put-to-call options on Adani Enterprises as measured by open interest slid to a six-month low amid last week’s rout, briefly dropping to about two standard deviations below the 24-month average. Whenever the ratio has breached that level in the past, a reversal in the shares has taken place, according to data compiled by Bloomberg based on regression analysis.

The decline in the put-call ratio for the group’s flagship entity is a result of more calls being created relative to puts, which suggests institutions that sell calls are confident the stock will either move sideways or keep going lower. At the same time however, history shows that when the market becomes too confident in favoring one direction, the reverse tends to take place.

3. Aggregated Positioning

The aggregate put-call ratio for the combination of the four Adani Group stocks that have associated derivatives — Adani Enterprises, Adani Ports & Special Economic Zone Ltd., ACC Ltd. and Ambuja Cements Ltd. — has yet to reach the level where it may be considered extreme. On the broader group basis therefore, the recovery may still have room to run.

Adani Ports and ACC both rose for a second day on Monday.

The combined put-call ratio for the group based on open interest ended last week at 0.89, about two standard deviations above the two-year average. A further increase that pushes the ratio toward the level of three standard deviations would mean sellers of put options had become excessively confident of a further rally, which may pave the way for a pullback.

4. Technical Position

The low set by Adani Enterprises last Friday is also significant from a technical point of view as it contains several support levels. The area around the low includes the 78.6% Fibonacci retracement level of the stock’s 3,500% rally from early 2020 to December’s record high, and it’s also where the volume-weighted average price since the pandemic bottom lies.

On the upside, the shares are likely to run into resistance between 1,720 and 1,920, where there are so-called “polarity levels” from 2021 and 2022. Any failure to overcome those barriers, followed by a break below the Fibonacci support level at around 988 may further embolden bears. If that occurs, the shares may slide as far as support at the 88.6% Fibonacci retracement line, at around 580, a drop of more than 60% below Friday’s close.

“It’s important to bear in mind that when stocks are hit by a crisis after sky-high valuations, they need time to consolidate to wear off the negative sentiment before the next bull market begins,” said Jai Bala, chief market technician at Cashthechaos.com, an independent market advisory firm. The character of the next tactical move will provide a hint about how much damage has been done on the longer-time frame charts, he said.