ICICI Securities Limited

Market Neutral Strategy

December 22, 2010

Delta gamma neutral strategy

Rationale 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
• To benefit from a broad expiry range by keeping strategy
strategy with minimum net credit of | 86.
delta low
After two weeks, India VIX has dipped below 20 levels. The sustainability below
• To counter a likely upsurge in volatility, the strategy gamma 20 levels has its significance because it may result in range bound to positive bias
is kept near zero 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.

Highlights Strategy pay-off

Profitable range 6014-6186 Spot closing at expiry

Maximum Profit | 4300 Option Type Action Strike Prem Lots 5600 6014 6050 6100 6186 6400

Maximum Loss | 700 Put (Jan) Buy 6000 112 1 288 -112 -112 -112 -112 -112

Risk Reward 1:7 Call (Jan) Sell 6100 112 1 112 112 112 112 26 -188
Source: NSE, Seediff, ICICIdirect.com Research 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
Source: NSE, Seediff, ICICIdirect.com Research
Strategy benefits Strategy chart
1) The strategy is profitable if the Nifty Jan series expires in
Payoff as on expiry
the range of 6014-6186 4300

2) The strategy will have maximum profits of |4300 if the 3300

Nifty Jan series expires at 6100
2300 Profit/Loss
3) The strategy will have maximum loss of |700 if the Nifty
Jan series expires beyond the profitable range of 6014-6186 1300

300

-700
5800

5850

5900

5950

6000

6050

6100

6150

6200

6250

6300

6350

6400

Nifty Strikes

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 Definitions:
amit.gup@icicisecurities.com Vega: It measures the effect of volatility on option premiums
Azeem Ahmad
Delta: It measures the effect of underlying movement on option premiums
azeem.ahmad@icicisecurities.com
Gamma: It measures the effect of underlying movement on delta

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