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Uralsib - Russia Equity Research - Options Weekly - Get On the Board; Long term exposure for new year - Dec 11, 2009.

New Year - a new target. We recently issued a report on our strategy outlook for 2010 (Russia Remont, published on 2 December). For end 2010, we project an RTS target of 1,950 (34% upside) and a MICEX target of 1,700 (28% upside) based on a revision of some key market and economic drivers. Driven by expected improvements in the Russian economy, we expect both indices to reclaim their record highs, set back in 2008, in the second quarter of 2011. Russian equities are trading close to those emerging-market peers (when oil & gas stocks are excluded), but stronger earnings growth in 2011E will again open the discount gap. Russia (excluding oil & gas stocks) is trading at a 2011E P/E of 9.9, while the forecasted GEM average is 12.8. This will help Russian stocks, especially the domestic themes, to outperform the emerging-market average in 2010. To take advantage of this we offer a number of derivative strategies, which will provide the opportunity to participate in the market advance at less cost and risk.

(To view the full report please click here:

- Stock replacement for Gazprom. This strategy consists of a long OTM 105% call option on Gazprom, which will expire in six months, in tandem with a sold (proportionally 5 to 3) six-month OTM 85% put option on the same underlying asset. The sold put finances the bought call and, as a result, the premium paid for the strategy will be very low. With this strategy there is 15% protection from downside risk in the event of a correction.

- In the money call spread for Sberbank. This entails buying a deep 70% ITM call option, which will expire in six months, and selling a deep 130% OTM call option with the same maturity. The short call option reduces the time value, hence the premium for the strategy consists mostly of intrinsic value. Also, the strategy gives triple leverage with no margin calls. The trade's P&L between the strikes is similar to being long the underlying asset.


Buy stock replacement for Gazprom. One of the best positioned instruments is Gazprom. Fundamentally, the stock is a more attractive investment in the long-term than any of its oil & gas peers. Our offer involves buying a 105% six-month call, and selling an 85% six-month put (in proportion of 5 to 3), which will cost 1.2% of notional. This should produce a return that is 106.2% of the current level (taking into account the premium paid), however the entire premium will be lost if the stock is between the strikes at expiration. The position costs just 1.2% because the long call is largely financed by the short put; therefore freed-up funds can be put to use elsewhere. The strategy only begins to lose money beyond the premium paid, if the stock is below the 85% strike at expiration. This is a medium-term trade that plays on Gazprom's fundamental potential.


- Exposure to potential growth

- Low cost thanks to the short put

- Provide protection from downside risk between the strikes

- Frees up funds which can be used elsewhere


- If the stock is below the lower strike at expiration, a loss is incurred equal to the difference between the stock price and the lower strike, leveraged at a ratio of 5 to 3.

Buy deep ITM call spread for Sberbank. Banks are expected to see strong growth in operating income in 1H10, boosted by high net interest margins, loan growth and improved cost efficiency. We recommend to buy a deep in-the-money call spread for Sberbank shares, which are the best positioned in the banking sector. Sberbank's upside potential is 36% at the current market price; hence, the strategy offered may be highly profitable for the buyer. The investor buys one six-month call with a 70% strike, and sells one deep OTM 130% call with the same expiration. The in-the-money options premium will include intrinsic value and time value. Although time value makes up a relatively small part of the in-the-money call's premium, it nonetheless reduces profit-making potential.

To neutralize the cost-of-time value, the upper strike is set so that the premium from sale of the option equals the time value component of the long call's cost. Thus, between the two strikes, the strategy offers the same P&L profile as a long stock position. This strategy will cost the buyer 30.7% of notional, which implies a time value of just 0.7% of notional. The spread provides triple leverage for greater returns from an upward movement, and provide a very high ROI in a 25-30% market increase. In addition, the strategy does not require a maintenance-margin if the market moves in a negative direction. Traditional leverage plays require continual marking to market and, if the maintenance-margin limit is breached, the position may be liquidated arbitrarily. Our strategy limits the risk up to the premium paid, meaning that no further losses are incurred below the lower strike and, thus, no additional margin payments are required.

One of the strategy's negatives is its high cost, although the triple leverage, absence of margin calls and time premium, and the long-term nature of the strategy make up for this. Another minus is potential difficulty in exiting the position early. Finally, the limited profit capacity, should the underlying surpass the upper strike, is also a negative. However, the ROI in this case would be almost 100%.


- Triple leverage

- Absence of margin calls if underlying falls

- Time premium neutralized

- Potential losses limited to premium


- High cost

- Difficult to close early

- Limited profit potential

Who may use these strategies? We recommend these strategies for those who plan to invest in our top picks. All strategies provide attractive opportunities to enhance portfolio yields. They also offer protection from downside risk by a safety cushion, while giving the opportunity to participate in upside with reduced cost of entry. Finally, freed up money could be switched to other investments.

URALSIB Capital, 8, Efremova St, Moscow, Russia,119048,


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Publication:Russian Banks and Brokers Reports
Date:Dec 11, 2009
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