Monthly Derivatives

Sustainability above 8250/8050 likely to lead pullback towards 8650

Research Analysts
Amit Gupta
amit.gup@icicisecurities.com
Azeem 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

8.0%
6.0%
9%

4%

3%

3%

3%

3%

0.0%

-1%
-3%
3%

-4%

-4%

-3%
3%

-2.0%

Apr'15

Mar'15

Nov

Oct

Sep

Aug

Jul

Jun

May

-4.0%
Apr

The stock action in the April series was hugely influenced

by Q4FY15 results. During the month, a weak set of
quarterly numbers from IT pushed these stocks lower. At
the same time, better-than-expected results from banking
stocks pulled stocks from this space higher

2.0%

4%

Sectoral focus seems to be on banking, metals in coming

month

4.0%

6%

Feb'15

In the last two expiries, which ended with losses, there has
been a trend of the Nifty making a pullback soon after an
expiry. A similar trend is expected in the May series as well
as the Nifty is expected to take support at lower levels of
8050 and head higher

10.0%

Jan'15

Nifty expiry returns in trailing 12 months

Profit booking in the broader markets led to a decline in the

April series. This is the third expiry on the trot where the
Nifty has closed with losses

Dec

S t l performance
Sectoral
f
iin April
A il : broad
b d based
b d weakness
k
IT

The broader market indices ended mixed. While the

midcap index ended with a loss of 1%, the small cap index
managed to hold in the positive territory

Capital Goods
Nifty
Mid Cap

Based on the April series rollover data, we maintain our

positive bias on metal stocks (moving up on strong short
covering trend) and banking stocks (many of them have
reported strong Q4 numbers)

Small Cap
Banks
Metal
8

2
0
-2
% monthly return

-4

-6

-8

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 triggered
by 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 cuts
have already panned out. A weak Q4 earnings season did not help this as well, which was also the key reason for
the recent decline

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

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

25%
20%
15%
10%
5%
0%
Indonesia

India

Turkey

US

Thailand

UK

Philipines

So
outh Africa

Japan

Brazil

Germany

France

Russia

Italy

-5%

Sustainability above 8250/8050 likely to lead pullback towards 8650

Why
yp
positional support
pp
is p
placed near 8050?

May series is starting with the highest options base at the 8100 Put strike. At the same time 8000 Put also has high open
interest. 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
for May (globally, however, there are some headwinds building in the form of crude price up move, Greece debt crisis and
fears 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 domestic
institutions.

Nifty options build-up in May series

Nifty 2 sigma Band : sigma expansion likely

9700

9200
8700

3.5

8200
7700

7200
6700

1.5

Call OI

Nifty

Put OI

Mean+ 2 SD

Average

Mean - 2 SD

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Aug-14

Jul-14

May-14
M

89900

88800

87700

86600

85500

84400

83300

82200

81100

80000

Jun-14

6200
5700

1
0.5
79900

OI in Million Sharres

3
2.5

Bank
Better-than-expected
Q4 numbers trigger banking outperformance
DealNifty:
Team
At Your Service

The banking index held its ground during the April series as better
better-than-expected
than expected results from many key private
banking 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 has
outperformed the Nifty in the recent leg. On declines, it has recovered from 17700 since November 2014. We
expect 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 stocks
have so far been unable to recover as their results are still awaited. The only result from Andhra Bank has remained
positive, 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 Nifty
has 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 Nifty
Bank
Nift options
ti
bbuild-up
ild
f M
for
May series
i
0.7

0.5
04
0.4
0.3
0.2
0.1

Call OI

Put OI

195000

193000

191000

189000

187000

185000

183000

181000

179000

177000

0
175000

OI in Millions

0.6

FIIs
outflows
for current
decline in market
Deal
Teamkey reason
At Your
Service

30000
25000
20000

In the index futures segment short creation was seen as the OI

during the series increased 25% amounting to over US$ 340
million. In the Index option segment there was constant
buying as participants rushed to hedge their cash portfolios

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Jun-14

Jul-14

Aug-14

-5000

Debt market flows missing as the limit of Govt debt is almost hit
20000
15000
10000

With
Wi
h the
h government kick
ki k starting
i
b
borrowing
i
f
for
2016
(expected to be over | 6 trillion), the bond market is likely to
see improved fund allocation as the borrowing programme is
expected to be front loaded. This could make equity markets
lacklustre for a while as bulk of the flows target debt.

5000
0
-5000

-10000

Apr-15

Mar-15

Feb-15

Jan-15

Dec-14

Nov-14

Oct-14

Sep-14

Aug-14

Jul-14

Apr-14

-15000
15000
Jun-14

With the US Fed delaying an interest rate lift-off till June, fund
allocation in EMs has resumed.
resumed However,
However India has not been
favoured largely because key events like RBI rate cut and
Union Budget are already over. Now, the focus is back to
corporate earnings & growth in Q4, which have been a mixed
bag till now

5000

May-14

10000

May-14

Outflows were seen in the debt segment as well while during

the month there was outflow of over US$1 billion. Last time,
outflow from the debt segment was seen in April 2014

15000

Apr-14

Bulk of FIIs cash buying in last two months is seen mostly in block
deals

INR in Crr

In April,
April FII inflows were in excess of US$1.5
US$1 5 billion.
billion However,
However
this figure is showing inflows only because of the Sun Pharma
block, which totalled close to US$3 billion. Thus, if one looks at
the net figure, FIIs have actually taken out close to US$1.5
billion. A similar trend of FII flows was also seen in March,
wherein
h i nett off block
bl k deal
d l FII inflows
i fl
were tepid
t id

INR is Cr

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

As the Nifty plummeted from 8840 from the middle of the month to 8200 towards April expiry,
expiry India VIX,
VIX the investor
investorss fear
gauge, 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. It
suggests the volatility on domestic bourses is higher than US. The impact of this surge of India VIX has been negative on
Indian 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

Positional
Recommendations
Deal Team
At Your
Service
1)) Federal
F d l Bank
B k (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
stock. The stock is currently trading with record high leverage
leverage. However,
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;
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 quarterly
numbers on April 27, which fuelled further upsides in the stock. In the last month, however, as the stock initially tumbled over
15% to 400, the OI in the stock swelled 35% to 5700 contracts. These were short positions, which were rolled into the May
series and are getting covered now.
now With the stock moving above the key shorting level of | 480,
480 short positions are getting
unnerved. 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:
Godrej Industries has been in a secular trend of an up move since the start of 2015. The stock has already registered strong
growth of over 40% from the lows of | 270. It is constantly moving up on the back of short covering while the current OI is the
lowest seen in the trailing one year. As the stock has moved into the new orbit by trading above | 370 levels, long additions
are likely to pan out in the stocks, which is likely to take the stock higher. On the lower side, support is placed near April
expiry
i low
l
off | 335,
335 where
h
th stock
the
t k witnessed
it
d highest
hi h t volumes
l
since
i
F b
February
2014 Hence,
2014.
H
we recommend
d buy
b
on the
th
stock, with a target price of | 445 and stop loss of | 331.

Positional
Recommendations
Deal Team
At Your
Service
4) Alpha
Al h Trade
T d : Buy
B JSW St
Steell & sell
ll Nift
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: 9.13
Rationale:
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.

Forthcoming
Events
Deal Team
At

Your Service

India:
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:
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 : BoJs Annual Rise in Monetary Base

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

z
z
z
z
z

UK:
07 May : General Elections
11 May : BOE Bank Rate and BOE Asset Purchase Target
13 May : BoE Inflation Report
19 May : CPI, RPI and PPI
29 May : GDP

Portfolio allocation in Derivatives Products

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
amountt to
t each
h recommendation
d ti
Stock Trader & Quant Picks recommendations should be considered in cash segment and stoploss on closing basis.
Time frame for these recommendations is 3 month.
Allocation
Products

Return Objective

Product wise Max allocation

allocation
per stock

Frontline Mid-capp
Number of Calls Stocks
stocks

Duration

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 Derivatives
Monthly
D i i

15%

3 5%
3-5%

47S
4-7
Stocks
k

7 10%
7-10%

10 15%
10-15%

1M
Monthh

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%

22-3%
3%

22-33 Alpha strategy

5%

3 Months

Volatility Insights

5%

2-3%

1-2 Strategy

8-10%

10-15%

1-2 Month

ArbitrageOpportunity

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

Stock option & Strategy

5%

3-4%

2-8 Stocks

3-5%

1-14 days

Currency Futures

5%

3-4%

3-5 Calls

Intraday

11

P k j Pandey
Pankaj
P d

Headd Research
H
R
h
pankaj.pandey@icicisecurities.com
k j
d @i i i
iti
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
R d no.7,
Road
7 MIDC
Andheri (East)
Mumbai 400 093
research@icicidirect.com

12

Disclaimer
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