Today, I came across a special situation in Futures price of Aban Offshore. Aban Offshore is trading in banned category, i.e you cannot create new open position in this segment (Or you have to pay the penalty).
The price of Aban in Cash Market was Rs 351/- whereas in derivatives market, it was trading at Rs 313/-. We can say there is backwardation of Rs 38/-. There is no dividend in the stock.
Then why is there a huge backwardation, It seems the backwardation is because of heavy shorts in the stock and no player can buy the stock in derivatives because of ban. Can we identify the opportunity ?
Yes, very simple buy Aban in June series. I agree it is in ban and you cannot create new position, but u can do that by paying the penalty which is 1% per day of contract amount.
The contract is expiring on Thursday, So if you buy on Tuesday, you will have to pay penalty for 2 days which will come to Rs 6.20/- , that means if you buy at LTP of 313 your cost of purchase will increase to 319.20. Still it is at a steep discount of almost 9 %. On Thursday the price has to converge and if they converge at mid point, then also there is money to be made.
What can go wrong ?
This not an arbitrage bet, but it is a direction bet that Aban price in cash will not fall drastically. The loss will start if price in cash market falls below 320/-, it is a high beta stock, but we can take solace that 52 week low price of this stock is 320.10. Hence we can safely say that risk reward is in our favor.
Moreover the backwardation up-to yesterday was only Rs 23/-.
This is not a recommendation to anybody whatsoever to buy or sell this share, but it is my thought process and views on this topic.
I welcome your critical comments and suggestions