Zero Risk Derivative Strategy Applied During Stake sale In PSU'S

Traders are Gearing for making quick money from possible arbitrage opportunities coming in the share sales of Public sector Units like Power Grid corporation and Indian Oil corporation,the government which has set disinvestment target of 40000 crore for the current financial year,is expected to sell its stake in two public sector undertakings.Traders are aiming to benifit from the difference between the current market price of these two stocks and their expected price in Follow on Public offer,for this traders are building short positions by selling their December futures contracts in anticipation that the issue pricing will be lower than the current market price,the powergrid band is already fixed at 85-90 per share,while that of IOCL can be 190 per share which is around 5% discount to the market price.Typically traders build short positions in disinvestment candiates ahead of their stake sales and cover their positions by applying in share sale,its an zero risk strategy which involves selling the stock in futures market at a higher price and then applying in the public issue at a lower price.Good number of short positions have alrady been build up in power grid corporation where futures is already trading at discount.

There is something refered as stock lending and borrowing mechanism-a shareholder usually a longterm one lends his idle shares to a trader who wants to short sell the stock for fee,a short seller shorts the stock and waits for it to slide,if the shares fall,short seller buys back these and returns these to lender,the profit for short seller is the difference in prices at which he sells and buys back,at the time of NTPC stake sale,the price of borrowing ntpc rose 41% which was record high.

In the past traders have used different trading strategies to profit from OFS,the most common was selling the securities in the cash market on the OFS day and making the payout through shares brought through bidding,this is possible as trader under OFS are settled on the next day (T+1),ehile security pay out of short sold ones takes place at  T+2 basis,this strategy was sucessful one in HINDUSTHAN COPPER  OFS where traders recorded a spread about 40%,However there is a risk,if shares do not get alloted they will be caught,as the two previous government share sales in NMDC and OIL INDIA saw huge subscriptions,this strategy went wrong who didnt record allotment,most trading strategies for an OFS are subject to allotment risks,but given large size of Power grid and coal india  issue,the probability of getting allotment is higher.