December 22, 2010

ICICIdirect.com | Equity Research

Market Neutral Strategy

ICICI Securities Limited

Buy 1 lot each of Nifty Jan 6000 Put at 112 and Nifty Jan 6200 call at 70. Sell 1 lot each of Nifty Jan 6100 Call at 112 and Nifty Jan 6100 Put at 156. Execute the strategy with minimum net credit of | 86. After two weeks, India VIX has dipped below 20 levels. The sustainability below 20 levels has its significance because it may result in range bound to positive bias in Nifty. The base formation exercise seen in near the money puts, suggests that market is likely to find support on declines. In addition, lesser activity in the OTM call options ranging from 6200-6400 suggests lack of interest at higher levels. This demands a strategy, which will gain from expected narrow range and at the same time is insulated with large movements in underlying. The total gamma value of the given strategy is very low which negates the impact of volatility spurt in delta neutral positions to a large extent. The given strategy is also designed with a view to capture the time value in the market by selling two near the money options. High gamma values lead to big changes in delta value, resulting in exponential gains or losses on wild swings in the market. In the given strategy, the high gamma value of two sell positions of 6100 Call & Put options is reduced by buying 6000 Put and 6200 Call options. Strategy pay-off

Option Type Action Strike Prem Lots 5600 6014 6050 6100 6186 6400

Put (Jan) Buy 6000 112 1 288 -112 -112 -112 -112 -112

Call (Jan) Sell 6100 112 1 112 112 112 112 26 -188

Put (Jan) Sell 6100 156 1 -344 70 106 156 156 156

Call (Jan) Buy 6200 70 1 -70 -70 -70 -70 -70 130

Profit/Loss per share -14 0 36 86 0 -14

Total Profit/Loss -700 0 1800 4300 0 -700

Spot closing at expiry

Source: NSE, Seediff, ICICIdirect.com Research Strategy chart

Payoff as on expiry

-700

300

1300

2300

3300

4300

6400

6350

6300

6250

6200

6150

6100

6050

6000

5950

5900

5850

5800

Nifty Strikes

Prof

it/Lo

ss

Source: NSE, Seediff, ICICIdirect.com Research

Greeks analyser

Greeks/Puts 6000 6100 6100 6200 Strategy

Delta 0.45 0.59 0.43 0.32 0.25

Gamma 7.5 7.37 7.44 6.78 0.53

Analyst

Amit Gupta amit.gup@icicisecurities.com

Azeem Ahmad

azeem.ahmad@icicisecurities.com

Delta gamma neutral strategy

Strategy benefits

1) The strategy is profitable if the Nifty Jan series expires in

the range of 6014-6186 2) The strategy will have maximum profits of |4300 if the Nifty Jan series expires at 6100 3) The strategy will have maximum loss of |700 if the Nifty Jan series expires beyond the profitable range of 6014-6186

Definitions: Vega: It measures the effect of volatility on option premiums Delta: It measures the effect of underlying movement on option premiums Gamma: It measures the effect of underlying movement on delta

Highlights

Profitable range 6014-6186

Maximum Profit | 4300

Maximum Loss | 700

Risk Reward 1:7Source: NSE, Seediff, ICICIdirect.com Research

Rationale

• To benefit from a broad expiry range by keeping strategy

delta low

• To counter a likely upsurge in volatility, the strategy gamma

is kept near zero

ICICIdirect.com | Equity Research Page 2

ICICI Securities Limited

Derivatives research – product basket

Directional Non-directional Quant products Long build up/Short covering Futures Theta & Vega strategies Pairs trading Short build up Futures Delta differential strategy Enhanced basket High OI stocks – delivery product Option indicators analysis VIX Analyser Plain vanilla options Gamma neutral delta neutral strategy Volatility insights Deep Value Strategy Reverse, Synthetic options & Situational arbitrage Quant Picks Hybrid Strategies – Index/Stocks Opportunity Matrix Rollover week product ( High/low rollover stocks)

Calendar Spreads

VWAP(expiry day product) Ratio Spreads

DISCLAIMER: The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities Limited. "The author of the report does not hold any investment/open position in any of the companies mentioned in this report. ICICI Securities Services Ltd (I-Sec) may be holding a small number of shares/ an open position in the above referred companies as on the date of release of this report." This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. The recipient should independently evaluate the investment risks. ICICI Securities Ltd and affiliates accept no liabilities for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Actual results may differ materially from those set forth in projections. ICICI Securities Ltd may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities Ltd and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

ICICIdirect.com Derivatives Desk

ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka Andheri (East), Mumbai – 400 093