By Shubham Agarwal, Head of Quantitative Research, MOSL

Option Writing
Strategy 1
Writing against Cash / Futures Holding
Sell Divi’s Lab 800 PE Oct 26 at Rs 14.90
Target level : Rs 1
Stop Loss level : Rs 19
Gross Monthly Yield : 3.04%
ROI : 4.66%
Margin : Rs 2,55,000
Days to expiry : 17

Writing with Hedging
Leg 1: Sell Divi’s Lab 800 PE Oct 26 at Rs 14.90
Leg 2: Buy Divi’s Lab 780 PE Oct 26 at Rs 10
Target level : Rs 0.50
Stop Loss (Spread) level : Rs 6.75
Gross Monthly Yield : 1%
ROI : 1.86%
Margin : Rs 2,10,000
Days to expiry : 17

Strategy 2
Writing against Futures Holding
Sell Maruti 7,850 Oct 26 PE at Rs 100
Target Level : Rs 5
Stop Loss level : Rs 135
Gross Monthly Yield : 2.23%
ROI : 8.9%
Margin : ~Rs 167000
Days to expiry : 17

Writing with Hedging
Leg 1: Sell Maruti 7,850 Oct 26 PE at Rs 100
Leg 2: Buy Maruti 7,750 Oct 26 PE at Rs 63
Target Level : Rs 1
Stop Loss (Spread) level : Rs 50
Gross Monthly Yield : 0.83%
ROI : 3.60%
Margin : Rs 1,54,000
Days to expiry : 17

Volatility is expected to fall based on forecasted volatility model ‘GARCH’ along with accelerated time decay in fi nal week to expiry. Statistical reversion is expected in the pair based on our mean-reversion model. The pair is co-integrated and passes the stationary test. The distribution is around normal.

Pair Trading
Strategy 1
Leg 1: Buy Biocon 1 Lot Oct 26 at Rs 351 and
600 shares in cash
Leg 2: Sell Star 2 Lots Oct 26 at Rs 843
Tenure : 3-4 days
Target Profi t : 3.25%
Stop Loss : 1.25%
Margin : Rs 1,87,000

The pair is well co-integrated. The distribution is not normal and skewed to the left and has evidence of a reversion within its own distribution.

Pair Trading
Strategy 2
Leg 1: Buy MRPL 1 Lot Oct 26 at Rs 127.75 and
2,625 shares in cash
Leg 2: Sell GAIL 1 Lot Oct 26 at Rs 454.75
Tenure : 3-4 days
Target Profit : 3.25%
Margin : Rs 1,57,000
Stop Loss : 1.25