Tactical Insights Searching for Relative Value [citibank capital markets] $GDF

- Most-Least Preferred — Each month our analysts select their most and leastpreferred stocks over a three-month horizon, and we aim to identify which of these preferences make the most promising relative value trades. This month we extend our volatility analysis to form a framework to quickly identify option pair trades.

- Volatility Pairs Framework — We screen for three factors to identify volatility pairs: 1/ Implied volatility spreads between stocks within sectors that are well above their historical average. 2/ Pairs with similar implied vol levels, such that the potential performance is relatively underpriced for one stock and overpriced for the other, and the strategy can be initiated for close to zero net cost. 3/ The implied to realised volatility richness levels of the pair are favourable – ie cheaper for the options being bought and richer for the options being sold.

- Promising Combinations – Outperformance — From our Most-Least Preferred portfolio, we flag for consideration these relative value trades which appear attractive from a volatility perspective. For outperformance pairs (buy calls vs sell calls), we highlight: Richemont vs Marks & Spencer; GDF Suez vs RWE; BG Group vs Repsol; Tomkins vs Schneider; Vodafone vs France Telecom.

- Promising Combinations – Underperformance — From our Most-Least Preferred portfolio for underperformance pairs (buy puts vs sell puts), we highlight: Commerzbank vs Credit Suisse; Legal & General vs Swiss Life; Ahold vs Imperial Tobacco; Saint Gobain vs TNT; and WPP vs Cable & Wireless.

- Promising Combinations – Liquid Universe — We highlight these option pair trades for consideration depending on one's risk appetite: Banks (Lloyds vs Unicredito – outperformance; HSBC vs Intesa Sanpaolo – underperformance); Consumer (PPR vs Next – outperformance; Ahold vs Unilever – underperformance); Insurance (Swiss Life vs Generali – outperformance); Industrials (MAN SE vs Philips – outperformance); Telecoms (Vodafone vs Telecom Italia – outperformance); Utilities (GDF Suez vs Iberdrola – outperformance).

-Buy RDShell / Sell Total 103% Jun-10 Calls for Net c1% of Spot — To illustrate the dynamics, we highlight the relative value (from both a volatility and directional perspective) of RDShell vs Total. RDShell's Strategy Update on 16th March offers the opportunity for greater clarity on the delivery and the subsequent evolution of growth/capex. For Total, we see little in the way of material catalysts or significant outstanding issues for the shares to outperform its peers.



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