Monthly Derivatives

Sustainability above 8250/8050 likely to lead pullback towards 8650…

Research AnalystsAmit Gupta amit.gup@icicisecurities.comAzeem Ahmad azeem.ahmad@icicisecurities.com Raj Deepak Singh rajdeepak.singh@icicisecurities.com

May 5, 2015

Nifty closes series with 2% loss: Third consecutive expiry with negative returns…

April series ends with 2% losses as FIIs shun equities Nifty expiry returns in trailing 12 monthsApril series ends with 2% losses as FIIs shun equities …

• Profit booking in the broader markets led to a decline in theApril series. This is the third expiry on the trot where theNifty has closed with losses

• In the last two expiries, which ended with losses, there has 6.0%

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been a trend of the Nifty making a pullback soon after anexpiry. A similar trend is expected in the May series as wellas the Nifty is expected to take support at lower levels of8050 and head higher

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Sectoral focus seems to be on banking, metals in comingmonth…

• The stock action in the April series was hugely influencedby Q4FY15 results. During the month, a weak set ofquarterly numbers from IT pushed these stocks lower. At

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Sectoral performance in April : broad based weaknessquarterly numbers from IT pushed these stocks lower. Atthe same time, better-than-expected results from bankingstocks pulled stocks from this space higher

• The broader market indices ended mixed. While themidcap index ended with a loss of 1%, the small cap indexmanaged to hold in the positive territory

Nifty

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managed to hold in the positive territory

• Based on the April series rollover data, we maintain ourpositive bias on metal stocks (moving up on strong shortcovering trend) and banking stocks (many of them havereported strong Q4 numbers) Metal

Banks

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-8-6-4-202468% monthly return

On the back of profit booking post Union Budget, interest rate cuts, Indian equities one of the worst performers so far in 2015…

• After strong 30% returns for 2014, the Nifty is down 1% for 2015 (as of April 30, 2015). This decline was triggeredby quite a few key global fund allocators who raised concerns on overheating of Indian equities in the short-term

• The profit booking trend was also magnified as the most anticipated events viz. the Union Budget and RBI rate cutshave already panned out. A weak Q4 earnings season did not help this as well, which was also the key reason forthe recent decline

• From a fund allocation stand point, tactical portfolio flows are seen in Brazil and Russia, which were severelyimpacted by the commodity and crude sell-off. Post the ECB QE, European equities also witnessed a strongperformance while most key European markets are also up over 15% each in 2015. Turkey, India and Indonesiaremained underperformersremained underperformers

Indian equities clocking one of the weakest performance in EMs & DM …

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Sustainability above 8250/8050 likely to lead pullback towards 8650 …

Why positional support is placed near 8050?y p pp p

• May series is starting with the highest options base at the 8100 Put strike. At the same time 8000 Put also has high openinterest. Hence, the Nifty is likely to find support around 8050. Level of 8000 is also important, which bulls are likely to protect.

• Currently, Nifty - 2 sigma band also suggests support for Nifty around 8000 (visible in second chart below).

Why is 8650 resistance ?

• In the May series options build-up, the highest Call build up is seen at the 8600 Call of 3 million shares.

• On April expiry, we saw high rollover of positions in index heavyweights, many of which were higher beta and had leverage.This leverage, going ahead, is likely to push Nifty into consolidation on liquidation expected in these stocks at higher levels.

Consolidation expected in Nifty within above range

• Q4 results of most of the important index heavyweights are already out and there are no major foreseeable triggers remaining• Q4 results of most of the important index heavyweights are already out and there are no major foreseeable triggers remainingfor May (globally, however, there are some headwinds building in the form of crude price up move, Greece debt crisis andfears of a split mandate in the UK elections)

• Fund allocation action from global investors seems to have halted in India although the flow remains strong from domesticinstitutions.

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Nifty options build-up in May series … Nifty 2 sigma Band : sigma expansion likely

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Deal Team – At Your Service• The banking index held its ground during the April series as better-than-expected results from many key private

Bank Nifty: Better-than-expected Q4 numbers trigger banking outperformance …

The banking index held its ground during the April series as better than expected results from many key privatebanking stocks helped the index to outperform the Nifty. For the month, the banking Index was up over 1.5%

• The banking Index is likely to continue to lend support. It has an important support placed at 18000. The index hasoutperformed the Nifty in the recent leg. On declines, it has recovered from 17700 since November 2014. Weexpect the positive bias in the banking to continue till it holds the support of 18000. Call writing, on the higher side,is seen only at the 19000 strike

• Private banking stocks have outperformed in the recent leg after they reported better results. PSU banking stockshave so far been unable to recover as their results are still awaited. The only result from Andhra Bank has remainedpositive, which gives hope of some reversal in these stocks in the days to come

• The price ratio of Bank Nifty/Nifty has increased to 2.24 from 1.17, which also justifies the fact that the Bank Niftyhas been outperforming the Nifty. We expect this ratio to continue to move up towards 2.30

• Recent surge in G-sec yields and higher inflation reading in May could spoil the upward trend of the banking space

B k Nift ti b ild f M iBank Nifty options build-up for May series

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Deal Team – At Your ServiceFIIs outflows key reason for current decline in market…

• In April FII inflows were in excess of US$1 5 billion However Bulk of FIIs cash buying in last two months is seen mostly in block deals

• In April, FII inflows were in excess of US$1.5 billion. However,this figure is showing inflows only because of the Sun Pharmablock, which totalled close to US$3 billion. Thus, if one looks atthe net figure, FIIs have actually taken out close to US$1.5billion. A similar trend of FII flows was also seen in March,

h i t f bl k d l FII i fl t id20000

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wherein net of block deal FII inflows were tepid

• In the index futures segment short creation was seen as the OIduring the series increased 25% amounting to over US$ 340million. In the Index option segment there was constantbuying as participants rushed to hedge their cash portfolios 0

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Debt market flows missing as the limit of Govt debt is almost hit…

• Outflows were seen in the debt segment as well while duringthe month there was outflow of over US$1 billion. Last time,outflow from the debt segment was seen in April 2014

• With the US Fed delaying an interest rate lift-off till June, fundallocation in EMs has resumed However India has not been

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allocation in EMs has resumed. However, India has not beenfavoured largely because key events like RBI rate cut andUnion Budget are already over. Now, the focus is back tocorporate earnings & growth in Q4, which have been a mixedbag till now

Wi h h ki k i b i f 2016

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Cr• With the government kick starting borrowing for 2016

(expected to be over | 6 trillion), the bond market is likely tosee improved fund allocation as the borrowing programme isexpected to be front loaded. This could make equity marketslacklustre for a while as bulk of the flows target debt.

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Any sustainable short covering can be seen only above 5530. On downsides, selling pressure may aggravate below 5350 ….India VIX: Likely to consolidate in higher band of 14-20…

• As the Nifty plummeted from 8840 from the middle of the month to 8200 towards April expiry India VIX the investor’s fear• As the Nifty plummeted from 8840 from the middle of the month to 8200 towards April expiry, India VIX, the investor s feargauge, rose from 14 to 20.

• We believe India VIX is likely to stay in the elevated range of 14-20, with the pivot around its 100 week moving average of 18.

• The spread between India VIX and US VIX had moved into positive territory since the start of 2015 and is currently near 5. Itsuggests the volatility on domestic bourses is higher than US. The impact of this surge of India VIX has been negative onIndian equities wherein the Nifty is negative for the year while the S&P is up over 2% for the year

• With concerns on the Greece - eurozone stand-off , UK elections and Syria conflict still open, volatility is likely to stay elevated

India VIX likely to consolidate in the earnings season …

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Deal Team – At Your Service

) F d l B k (FEDBAN)

Positional Recommendations …

1) Federal Bank (FEDBAN)Buy FEDBAN in the range of | 130.5-133.5 Target | 160. Stop loss | 119 Rationale:

Ahead of Q4 numbers, most banking stocks were trading weak. However, a strong set of Q4 FY15 numbers in most private banking stocks has triggered a round of short covering in this space. The short open interest in some of the stocks is still high and Federal Bank is one such stock The stock is currently trading with record high leverage However with the pullback in theand Federal Bank is one such stock. The stock is currently trading with record high leverage. However, with the pullback in the stock, these short positions are getting closed, which is likely to provide the required fuel for further upsides in the stock. With banking stocks continuing to attract fund flows, Federal Bank is likely to perform.

2) UPL Ltd (UNIP)Buy UNIP in the range of | 480 487; Target: | 578; Stop loss: | 437Buy UNIP in the range of | 480-487; Target: | 578; Stop loss: | 437 Rationale

While the Nifty in the last week tumbled 1.5% , UPL ltd moved up over 15%. The company posted a strong set of quarterlynumbers on April 27, which fuelled further upsides in the stock. In the last month, however, as the stock initially tumbled over15% to 400, the OI in the stock swelled 35% to 5700 contracts. These were short positions, which were rolled into the Mayseries and are getting covered now With the stock moving above the key shorting level of | 480 short positions are gettingseries and are getting covered now. With the stock moving above the key shorting level of | 480, short positions are gettingunnerved. Closure in these positions is likely to provide impetus to the stock

3) Godrej Industries (GODIND)Buy GODIND in the range of | 364-371; Target: | 445; Stop loss: | 331 Rationale:Rationale:

Godrej Industries has been in a secular trend of an up move since the start of 2015. The stock has already registered stronggrowth of over 40% from the lows of | 270. It is constantly moving up on the back of short covering while the current OI is thelowest seen in the trailing one year. As the stock has moved into the new orbit by trading above | 370 levels, long additionsare likely to pan out in the stocks, which is likely to take the stock higher. On the lower side, support is placed near April

i l f | 335 h th t k it d hi h t l i F b 2014 H d b th

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expiry low of | 335, where the stock witnessed highest volumes since February 2014. Hence, we recommend buy on thestock, with a target price of | 445 and stop loss of | 331.

Deal Team – At Your Service4) Al h T d B JSW St l & ll Nift

Positional Recommendations …

4) Alpha Trade : Buy JSW Steel & sell Nifty Buy JINVIJ May futures at | 954-959 and sell Nifty May futures at 8350-8360. Current price ratio ( Nifty/JSW Steel) : 8.70, Target: 7.83, Stop loss: 9.13Rationale:

Since the middle of the April series, metal stocks have shown a lot of resilience. This has triggered buying in the metal space,which remained subdued for a long period. JSW Steel has also showed strong resilience in the recent Nifty decline towards 8100. It constantly held the lower support levels of | 930. The stock is still high on short positions, which is likely to propel fresh upsides in the Nifty, as short covering has commenced in the stock. The Nifty, on the other hand, witnessed strong declines in the expiry week. Post expiry, it has shown a pullback. We recommend an alpha trade recommendation of long JSW Steel and short Nifty, with a target price ratio of 7.83 and stop loss of 9.13.

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Deal Team – At Your ServiceIndia:

Forthcoming Events…

• 08 May : Local Car Sales• 08 May : Import & Export• 12 May : Industrial Production and CPI• 14 May : WPI• 29 May : GDP YoY• 31 May : Fiscal Deficit

• US:• 07 May : Initial Jobless claims• 14 May : PPI, Initial Jobless Claims, • 15 May : Industrial Production & Empire Manufacturing• 20 May : US Fed releases Minutes of FOMC Meeting of Apr 28-29• 22 May : CPI, US Manufacturing PMI• 29 May : GDP, Core PCE

Euro zone:• 06 May : PPI and PMI Services & Composite • 13 May : Industrial Production & GDP, ECB account of the Monetary policy Meeting• 19 May : CPI• 28 may : Consumer Confidence

Japan:Japan:• 07 May : Monetary Base, PMI Services and Composite• 13 May : BoP Current Account Balance and Trade Balance• 18 May : Industrial Production and PPI• 20 May : GDP • 22 May : BoJ’s Annual Rise in Monetary Base

• China:C a• 09 May : PPI and CPI• 13 May : Industrial Production• 21 May : PMI Manufacturing

UK:07 May : General Elections11 May : BOE Bank Rate and BOE Asset Purchase Target13 May : BoE Inflation Report19 May : CPI, RPI and PPI29 May : GDP

Portfolio allocation in Derivatives Products…

• It is recommended to spread out the trading corpus in a proportionate manner between the various derivatives• It is recommended to spread out the trading corpus in a proportionate manner between the various derivatives research products

• Please avoid allocating the entire trading corpus to a single stock or a single product segment• Within each product segment, it is advisable to allocate equal amount to each recommendation.• For example: The ‘Daily Derivatives’ product carries two intraday recommendations. It is advisable to allocate equal

t t h d tiamount to each recommendation • Stock Trader & Quant Picks recommendations should be considered in cash segment and stoploss on closing basis.

Time frame for these recommendations is 3 month.

Product wise Max allocation Frontline Mid-cap

Allocation Return Objective

pallocation per stock Stocks stocks

Daily Derivatives 5% 2-3% 2 Stocks 1% 2-3% Intraday

Weekly Derivatives 10% 3-5% 2 Stocks 3-5% 5-7% 1 Week

High OI stock 5% 2-3% 2-3 Stocks 5-7% 7-10% 1-2 Weeks

M hl D i i 15% 3 5% 4 7 S k 7 10% 10 15% 1 M h

DurationProducts Number of Calls

Monthly Derivatives 15% 3-5% 4-7 Stocks 7-10% 10-15% 1 Month

Global Derivatives 5% 2-3% 1-2 index strategy - - 1 Month

Stock Trader/ Stock in Focus 15% 2-3% 5-6 Stocks 7-10% 10-15% 3 Months

Quant Picks 10% 2-3% 2-3 Stocks 7-10% 10-15% 3 Months

Alpha Trader 5% 2-3% 2-3 Alpha strategy 5% - 3 MonthsAlpha Trader 5% 2 3% 2 3 Alpha strategy 5% 3 Months

Volatility Insights 5% 2-3% 1-2 Strategy 8-10% 10-15% 1-2 Month

Arbitrage Opportunity 5% 2-3% 2-3 Stocks > 2.5% >2.5% Event Based

Positional / Daily Futures 5% 2-3% 8-12 Stocks 1-3% 2-5% 1-14 days

Index option & Strategy 5% 3-4% 2-5 Nifty 2-3% - 1-14 days

1111

Stock option & Strategy 5% 3-4% 2-8 Stocks - 3-5% 1-14 days

Currency Futures 5% 3-4% 3-5 Calls - - Intraday

P k j P d H d R h k j d @i i i itiPankaj Pandey Head – Research pankaj.pandey@icicisecurities.comICICIdirect.com Research Desk,ICICI Securities Limited,1st Floor, Akruti Trade Centre,R d 7 MIDCRoad no.7, MIDCAndheri (East)Mumbai – 400 093research@icicidirect.com

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Disclaimer ANALYST CERTIFICATION

We /I, Amit Gupta B.E, MBA (Finance), Raj Deepak Singh BE, MBA (Finance), Azeem Ahmad MBA (Fin) Research Analysts, authors and thenames subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about thesubject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specificrecommendation(s) or view(s) in this report.

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