Derivatives Thematic
Amid low volatility, new market leaders may emerge with Nifty
targeting 10500...
July 14, 2017
Research Analysts
Amit Gupta [email protected] Azeem Ahmad [email protected]
Raj Deepak Singh [email protected] Nandish Patel [email protected]
Sectors Stocks Initiation Range Target Stoploss
Banking Canara Bank 352-358 415 321
Cement India Cement 208-213 254 187
Auto Ancillary Motherson Sumi 313-319 378 284Auto Ancillary Bosch Ltd 24000-24220 28560 21840
Low volatility trend started in developed market in 2016; in India it started only in
2017...
2
• Spread between India VIX and the developed market, volatility has started to decline in 2017. It suggests volatility
may continue in a declining trend in India
• The low volatility trend has continued in the developed market despite hawkish remarks by key central banks.
• With the US Fed likely to act on unwinding of balance sheet only towards 2017 end, the current volatility trend is
likely to continue
• Hence, India VIX is also likely to follow this low volatility trend, as no major domestic events are lined up in H2 2017
Low volatility started in DM in 2016; in India it started in 2017
At the start of 2016, as the
market was comforted by
unconventional monetary
polices of developed world
central banks, volatility
started to come down.
Even the surprising
outcomes of Brexit and US
Presidential election failed
to push volatility higher. In
India, however, lower
volatility trend started from
February 2017
Source: Bloomberg, ICICIdirect.com Research
Current reading is more than
mean-1.2 sigma away from
long run average
0
10
20
30
40
50
60
70
30
50
70
90
110
130
150
170
1-J
an-1
6
1-F
eb
-16
1-M
ar-1
6
1-A
pr-
16
1-M
ay-1
6
1-J
un
-16
1-J
ul-
16
1-A
ug-
16
1-S
ep
-16
1-O
ct-1
6
1-N
ov-
16
1-D
ec-
16
1-J
an-1
7
1-F
eb
-17
1-M
ar-1
7
1-A
pr-
17
1-M
ay-1
7
1-J
un
-17
1-J
ul-
17
Spre
ad
Vo
lati
lity
(No
rmal
ise
d)
Spread (India - Dev Market) US
India Europe
Hang Seng
Low volatility phenomenon started in EM & India with a lag with developed world
3
MSCI EM 30D HV : 55% lower than average
India VIX : 50% lower than 10-year average of 23
Currently, India VIX is
around 11 levels and has
been in this trend for over
six months. Historically, the
low volatility period has
continued for a long time.
The current reading is
mean-1.2*sigma away
from long term average
The historical volatility (HV)
trend of MSCI EM suggests
similar lower volatility
scenario. Current reading is
more than mean-1*sigma
away from long term
average
Source: Bloomberg, ICICIdirect.com Research
0
10
20
30
40
50
60
70
80
90
No
v-0
7
Jun
-08
Jan
-09
Au
g-0
9
Mar
-10
Oct
-10
May
-11
De
c-1
1
Jul-
12
Feb
-13
Sep
-13
Ap
r-1
4
No
v-1
4
Jun
-15
Jan
-16
Au
g-1
6
Mar
-17
Ind
ia V
IX
0
10
20
30
40
50
60
70
80
90
100
Jan
-00
Jun
-05
De
c-0
5M
ay-0
6N
ov-
06
Ap
r-0
7O
ct-0
7A
pr-
08
Sep
-08
Mar
-09
Au
g-0
9Fe
b-1
0Ju
l-1
0Ja
n-1
1Ju
l-1
1D
ec-
11
Jun
-12
No
v-1
2M
ay-1
3O
ct-1
3A
pr-
14
Sep
-14
Mar
-15
Sep
-15
Feb
-16
Au
g-1
6Ja
n-1
7
MSC
I EM
30
D V
ola
tili
ty
India VIX 10 Yr avg is 23 vs.
current reading of 11
MSCI EM 30D HV 10 Yr avg is 17.5
vs. current reading of 10.5
Globally low volatility continues across asset classes …
• Last 10 year cross asset volatility : signaling periods of low volatility continuing
• Implied volatility, which is an indication of future market volatility, suggests a calm environment could continue in
the short to medium term
• In the recent past, intermediate volatility spurts have remained short lived. This means the markets are in strong
lower volatility periods
• Hopes of a stronger recovery in global growth coupled with continued central bank support continue to keep
volatility lower
4
Percentile based on last 10 years
US Europe Japan UK
MSCI
EM
MSCI
Deve
Germa
n 10 Yr
US 10
yr WTI Gold Copper Euro Yen
Implied (3-month ATM, %)
Current 9.3 12.7 13.5 9.9 14.8 10.9 2.6 3.9 28.3 10.2 17.4 6.1 8
Percentile 1.8% 0.6% 1.2% 1.2% 2.8% 0.5% 0.4% 4% 28% 0.4% 11% 5% 11%
3M Chg -1.8 -5.1 -3.2 -2.1 -1.5 -2.4 -1.2 -0.6 -1.7 -2.4 -2.3 -3.2 -1.4
Avg 18.9 22.8 23.4 18.7 26.8 21.1 4.7 4.9 34.9 19.5 28.7 10.6 11
95th Percentile 35.9 37.1 37.1 33.5 46.2 36.2 7.6 5.9 59.7 34.5 49.7 16.4 15.8
5th Percentile 11.7 15.2 16.6 11.3 15.7 12.8 3 4 17.1 12.8 15.8 6.1 7.2
Realised (%)
1-Month 5.4 8.7 9.6 7.4 8.6 9.1 1.8 3 33.6 11.3 14.3 6.7 9.5
Percentile 2% 4% 2% 4% 6% 12% 2% 3% 58% 11% 12% 21% 46%
Average 17.5 22.2 23.6 17.8 18 17.4 3.9 5.8 35.2 18.3 26 9.8 10.4
CurrenciesEquities Bond Commodities
Higher volatility skew suggests scepticism still prevails for any tail risk event, as participants pay
more premium to Put vs. Call options – indicating room for volatility to remain lower
5
CBOE SKEW Index at 135, suggests scepticism
The Skew index (Put-Call)
premiums typically oscillate
between 100 and 150. The
closer the current level is to
100 the more likely it is that
investors assume a tail risk
event is negligible.
Current Skew level of 135 is
elevated by historical
standards, suggesting
market participants are
giving higher Put option
premium vs. Call options as
they fear tail risk to pan out.
This suggests there is room
for volatility to remain lower
Source: Bloomberg, ICICIdirect.com Research
100
110
120
130
140
150
160
Au
g-0
5
Mar
-06
Oct
-06
May
-07
De
c-0
7
Jul-
08
Feb
-09
Sep
-09
Ap
r-1
0
No
v-1
0
Jun
-11
Jan
-12
Au
g-1
2
Mar
-13
Oct
-13
May
-14
De
c-1
4
Jul-
15
Feb
-16
Sep
-16
Ap
r-1
7
0
10
20
30
40
50
60
70
80
90
0
200
400
600
800
1000
1200
1400
1600
Ap
r-1
2
Jul-
12
Oct
-12
Jan
-13
Ap
r-1
3
Jul-
13
Oct
-13
Jan
-14
Ap
r-1
4
Jul-
14
Oct
-14
Jan
-15
Ap
r-1
5
Jul-
15
Oct
-15
Jan
-16
Ap
r-1
6
Jul-
16
Oct
-16
Jan
-17
Ap
r-1
7
VX
X
XIV
VXX (long volatility ETF)
XIV (short volatility ETF)
Short volatility ETF continues to outperform Long volatility ETF…
6
CFTC data shows short OI has increased
Short volatility clearly outperforming long volatility
plays
Long volatility ETF has seen
strong losses while short
volatility ETF has yielded
constant profits. Long VIX
ETF is down over 99%.
short volatility ETF has
more than tripled
CFTC data suggests short
volatility bias. Since Brexit
in June 2016, the short
open interest has increased
four-fold in US VIX
Source: Bloomberg, ICICIdirect.com Research
0
10
20
30
40
50
60
70
80
Feb
-09
Jul-
09
De
c-0
9
May
-10
Oct
-10
Mar
-11
Au
g-1
1
Jan
-12
Jun
-12
No
v-1
2
Ap
r-1
3
Sep
-13
Feb
-14
Jul-
14
De
c-1
4
May
-15
Oct
-15
Mar
-16
Au
g-1
6
Jan
-17
VIX
ETF
(Sh
ort
OI I
n M
illi
on
s)
Intermediate spurt in volatility may be seen if US Fed balance sheet unwind pans
out, paving way for other central bank’s policy normalisation …
7
Balance sheet of key central banks > US $ 13tln
US Fed Balance sheet of US $ 4.5 tln to see unwind
Central bank’s monetary
policy driven low volatility
phase could see some spurt
when central bank’s
accommodative policies are
curtailed. US Fed’s decision
on unwinding balance sheet,
can trigger brief volatility
surge, which can lead to
intermediate profit booking in
equity markets
Other central banks are
also deliberating on
winding down balance
sheet, if growth and
economic conditions
continue to improve
Source: Bloomberg, ICICIdirect.com Research
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
Ap
r-0
8A
ug-
08
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c-0
8A
pr-
09
Au
g-0
9D
ec-
09
Ap
r-1
0A
ug-
10
De
c-1
0A
pr-
11
Au
g-1
1D
ec-
11
Ap
r-1
2A
ug-
12
De
c-1
2A
pr-
13
Au
g-1
3D
ec-
13
Ap
r-1
4A
ug-
14
De
c-1
4A
pr-
15
Au
g-1
5D
ec-
15
Ap
r-1
6A
ug-
16
De
c-1
6
In U
S $
tri
llio
n
Treasury Bills
Agencey MBSs
Agency Securities
TIPS
Fixed Rate Notes
Treasury Bonds & Notes
0
2
4
6
8
10
12
14
Mar
-00
Jan
-01
No
v-0
1
Sep
-02
Jul-
03
May
-04
Mar
-05
Jan
-06
No
v-0
6
Sep
-07
Jul-
08
May
-09
Mar
-10
Jan
-11
No
v-1
1
Sep
-12
Jul-
13
May
-14
Mar
-15
Jan
-16
No
v-1
6
Ce
ntr
al B
ank
Bla
nce
sh
ee
t in
US
$ t
ln BOJ ECB US FED
Focus may shift to underperforming sectors in case of intermediate profit booking
– balancing volatility of Nifty
• Sectoral contribution in Nifty gains since Jan 2017: The current Nifty up move is primarily driven by
Private Banking, NBFC and the FMCG space. As more than 65% contribution has come from these
sectors, its logical to have concern regarding some cool-off in their prices. On the other hand, there
are sectors like Cement, PSU Banking, Telecom and Auto which have seen in line performance.
Thus leadership baton may be passed to other sectors in case of profit booking in outperforming
space which is likely to restrict the Nifty declines.
8
Sector Current Weight Contribution in Nifty gain (points) %Contribution in Nifty Outperformance
Private Bank 23.1% 547 32.6% 9.5%
FMCG 11.3% 308 18.4% 7.1%
NBFC 8.1% 240 14.3% 6.2%
Capital goods 4.0% 101 6.0% 2.0%
Metal 3.1% 79 4.7% 1.6%
Telecom 2.0% 51 3.0% 1.0%
Oil&Gas 10.9% 200 11.9% 1.0%
Cement 2.1% 48 2.9% 0.7%
Media 0.8% 11 0.7% -0.1%
PSU Bank 2.9% 44 2.6% -0.3%
Auto 11.3% 128 7.6% -3.7%
Power 3.7% -4 -0.3% -4.0%
Pharma 4.6% -93 -5.6% -10.2%
Tech 11.1% -6 -0.4% -11.5%
Three sectors contributed
65% of Nifty gains so far. In
case of any intermediate
profit booking, focus may
shift to other sectors
New market leaders may
emerge from these sectors
May take some time to
witness strength
•Source : ICICIdirect.com Research, Bloomberg
Nifty surpasses Mean+2*Sigma levels of 9400 - Historically Nifty has continued
its up move once these levels are taken out…
9
Mean+2*Sigma =9400
Mean+ 2*Sigma
Source : ICICIdirect.com Research, Bloomberg
After more than three years, the Nifty has taken out Mean+2*Sigma
levels. Historically, the Nifty has moved towards Mean+3*Sigma
levels once these levels are taken out
In 2004, when the Nifty took out Mean+2*Sigma levels (shown by
circle 1), it broadly held these levels and finally hit Mean+3*Sigma
levels
In 2014, when the Nifty moved above Mean+2*Sigma again (shown
by circle 2), it had an up move of 30% and did not see major cool-off
until it hits Mean+3*Sigma levels
1
3
2
Now in May 2017, the Nifty has taken
out Mean+2*Sigma level of 9400
(shown by circle 3). We believe
intermediate profit bookings should find
support near 9300-9400 in the current
up trend
Nifty moving towards Mean+3*Sigma level of 11100 with intermediate hurdle
placed near 10500…
10
Currently Mean+3*Sigma level is
placed at 11100
The Nifty is moving towards Mean + 3* Sigma
level of 11,100. However, we believe 10500 may act
as an intermediate hurdle. On the other hand, any
major profit booking should get over near
Mean+2*Sigma levels. Hence, 9300-9400 should
remain a major support in the current uptrend
Mean+ 3*Sigma
Source : ICICIdirect.com Research, Bloomberg
Mean+3*Sigma level
of 2004-2007 rally
Mean+3*Sigma level
of 2013-2015 rally
Stock picks based on mean reversion indicator…
11
Sectors Stocks Initiation Range Target Stoploss
Banking Canara Bank 352-358 415 321
Cement India Cement 208-213 254 187
Auto Ancillary Motherson Sumi 313-319 378 284
Auto Ancillary Bosch Ltd 24000-24220 28560 21840
Canara Bank: Maximum period of sustainability above Mean +1*sigma since 2011
12
The PSU banking space has seen a significant correction of 25-30%. Stocks like
Canara Bank had come down to the major support of Mean+1*sigma. Hence, the risk
reward seems favourable in this stock to initiate long position. The current
sustainability period above mean+1*sigma levels is the highest since 2011 suggesting
increased buying interest
Initiation range: | 352-358 Target : | 415 Stop loss: | 321
Source : ICICIdirect.com Research, Bloomberg
India Cement: Finding support near Mean+1*sigma levels…
13
After the turmoil of 2008, India Cement has started gaining strength and
has been holding its mean +1*sigma levels after eight years of
consolidation. These levels are currently placed near | 190
Initiation range: | 208-213 Target: | 254 Stop loss: | 187
Source : ICICIdirect.com Research, Bloomberg
Motherson Sumi: Mean+2*sigma level is major support in current uptrend…
14
Motherson Sumi has moved above its mean+2*sigma levels after two
years. In such a scenario, further divergence from the levels is likely as
we have seen in 2014. On downsides, mean+2*sigma level is likely to
remain major support level for the stock
Initiation range: | 313-319 Target: | 378 Stop loss: | 284
Source : ICICIdirect.com Research, Bloomberg
Bosch Ltd: Consolidating above its Mean+1*sigma levels…
15
Bosch has started sustaining above its mean+1*sigma levels after three
failed attempts in the last two years. The stock has a tendency to see a
sharp up move above its mean+1*sigma levels
Initiation range: | 24000-24220 Target: | 28560 Stop loss: | 21840
Source : ICICIdirect.com Research, Bloomberg
1616
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
amount to each recommendation
• 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 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
Monthly Derivatives 15% 3-5% 4-7 Stocks 7-10% 10-15% 1 Month
Global Derivatives 5% 2-3% 4-5 stocks - - 1 Month
Quant Picks 15% 2-3% 6-8 stocks 7-10% 10-15% 3 Months
Alpha Trader 10% 2-3% 2-3 strategy 5% - 1-2 Month
Volatility Insights 10% 2-3% 3-4 Strategy 8-10% 10-15% 1-2 Month
Arbitrage Opportunity 5% 2-3% 2-3 Stocks > 2.5% >2.5% Event Based
Short term Futures 5% 2-3% 8-12 Stocks 1-3% 2-5% 1-2 days
Positional Index Strategy 5% 3-4% 2-4 Index calls - - 1-14 days
Stock option strategy 5% 3-4% 2-8 Stocks - 3-5% 1-2 days
Daily Currency Future 5% 3-4% 3-5 Calls - - 1-2 days
Monthly Currency Futures 5% 3-4% 2-3 Calls - - 1 Month
DurationProducts
Allocation
Number of Calls
Return Objective
16
17
Pankaj Pandey Head – Research [email protected]
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st
Floor, Akruti Trade Centre,
Road no.7, MIDC
Andheri (East)
Mumbai – 400 093
[email protected]
17
Disclaimer
ANALYST CERTIFICATION
We /I, Amit Gupta B.E, MBA (Finance), Azeem Ahmad MBA (Fin), CS, Raj Deepak Singh BE, MBA (Finance) and Nandish Patel, Research
Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately
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indirectly related to the specific recommendation(s) or view(s) in this report.
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18
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19
