ICICI Securities sees a big reverse arbitrate opportunity in AU Small Finance Bank, as its April future is trading at a sharp discount.

While the underlying stock of AU Small Finance Bank closed at ₹585.55, its April futures closed at ₹563.55. (₹22 in discount)

Reverse arbitrage

Arbitrage is the simultaneous purchase and sale of shares in order to profit from the mispricing opportunity available between the futures and cash prices of the same underlying. One can buy or sell stocks on spot and assume the opposite position in futures of the same stock to capture the difference between both prices.

For this, the difference between spot and futures prices has to be reasonably high so that one can not only cover the transaction costs but also earn profit. Towards expiry, prices of spot and futures converge and unwinding can be done at the same price.

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Hence, the initial difference will be locked in at the time of initiating the whole transaction. This difference yields risk-free returns since it will be independent of the price movement.

Currently, AU Small Finance Bank April future is trading at a discount of more than ₹15/share while no dividend is expected in the current month. This discount provides an opportunity for reverse arbitrage. Currently, this opportunity accounts for (14/5,760) = 260 bps.

We can lock in the difference of 243 bps at current prices. This will result in a risk-free profit of ₹14/share excluding brokerage and transaction costs, ICICI Securities said.

How to execute

According to the brokerage, traders should buy one lot of AU Small Finance Bank April futures at ₹561-562 and sell 1,000 shares (from demat holding) at ₹576-577.

Ensure that that the difference is at least ₹15/share to capitalise on the arbitrage opportunity, it said

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