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Jim Strugger, Managing Director, Derivatives Strategist

(203) 861-9060 jstrugger@mkmpartners.com

Morning Derivatives

March 9, 2016

Derivatives Strategy
The Volatility Regime in Pictures
Prior to the August 2015 shock, we had expected the low-volatility environment intact since the beginning of 2013 to continue for
another couple of years to approach the average of historical cycles. But the magnitude of that event, not just for U.S. equities but
across asset classes, was great enough to conclude that a transition into a high-volatility regime had begun. At the time, there was a
good amount of pushback since an inflection likely meant the return of a more challenging investment environment and end of the
6.5 year equity bull market.
Now when we reference being in a period of structurally elevated volatility, a typical response is along the lines of "Duh". After six
months of broad financial market turbulence, consensus has obviously shifted. But there is still plenty of intelligence to glean from the
derivatives markets about the eventual length of this regime, the timing and magnitude of future shocks and impact across asset classes.
With that in mind, we have attached an updated slide deck that attempts to lay out in linear fashion our view of things. It may not all
be self-explanatory, so please feel free to let us know of any questions or comments.
Flatter Kurtosis Mean Fatter Tails
Top: SPX return distribution December 2012 - August 2015
Bottom: SPX return distribution August 2015 - Present

Source: MKM Partners and Bloomberg

Headquarters: 300 First Stamford Place, 4th Floor East, Stamford, CT 06902
Member FINRA and SIPC. Additional Information on all of our research calls is available upon request.
See pages 32-33 for analyst certification and important disclosures.
This report is intended for replaceme@bluematrix.com. Unauthorized redistribution of this report is prohibited.

Derivatives Strategy: The Volatility Regime in Pictures

MKM Derivatives

Into the Thick of the High-Volatility Regime


March 2016

See pages 18-19 for Important Disclosures and Options


Risk Statement & Disclosures.
March 9, 2016

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Derivatives Strategy: The Volatility Regime in Pictures

Bio
Jim Strugger Managing Director and Derivatives Strategist - joined MKM Partners in August 2009.
Previously, Jim was the Equity Derivatives Strategist at Socit Gnrale and a derivatives
salesperson at Susquehanna International Group prior to joining MKM. He also spent eight years at
Morgan Stanley in economics, international equities and domestic equity sales. Jims derivatives
strategy work has been featured in Barrons where he has been a guest columnist and highlighted
as an increasingly influential volatility strategist Bloomberg, The Wall Street Journal and
Derivatives Week. He has a weekly derivatives segment on Bloomberg TV and appears regularly
on CNBC, BNN and Yahoo! Finance. Jim received his B.S. in mechanical engineering from Rutgers
University and an M.B.A. from Columbia Business School.

Jim Strugger
Managing Director
Derivatives Strategist
Head of Derivative Products
203-861-9060
jstrugger@mkmpartners.com
Sources of all graphs are Bloomberg and/or MKM Partners unless otherwise cited.
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Derivatives Strategy: The Volatility Regime in Pictures

Long Cycles of Volatility


There have been seven distinct volatility regimes since the inception of VXO in the mid-1980s: three
high-volatility and four low-volatility

Average duration has been around 5 years but the low-volatility regime from late-2012 to August
2015 measured just 2 years

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Derivatives Strategy: The Volatility Regime in Pictures

August Was the Trigger


Since inception of VIX there have been five prior 40-magnitude VIX shocks, all during periods of
structurally elevated volatility

Prior to the August shock we had expected the low-volatility regime to extend toward the historical
average around 5 years

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Derivatives Strategy: The Volatility Regime in Pictures

U.S. Equities Are Not In a Vacuum


Although a gap has recently opened between GFSI and spot VIX the two have tracked closely
historically

Hence we credit VIX with being representative of global cross-asset volatility

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Derivatives Strategy: The Volatility Regime in Pictures

Its a Global High-Vol Regime


GFSI measures risk via 41 sub-components across a range of asset classes and geographies
It inflected in earlier in 2015 actually preceding the shift in U.S. equity implied volatility

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Derivatives Strategy: The Volatility Regime in Pictures

A Global/Cross-Asset Regime

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Derivatives Strategy: The Volatility Regime in Pictures

Logical Given U.S. Economic Cycle Context


Over 3 U.S. cycles volatility inflections have tended to occur deep in economic expansions and at or
within a couple of years of the cycle peak

At 81 months in duration from the June 2009 recession trough, the current expansion is 14 months
shy of the 95 month trough-to-peak average of the prior three cycles

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Derivatives Strategy: The Volatility Regime in Pictures

Beware the High-Volatility Regime


Low-volatility periods (1991-1997, 2003-2007, 2013-current) historically provide a positive backdrop
for equities with low implied correlation, flat skew and stable upward-sloping term structure

On average, SPX monthly returns are positive 67% of the time, while spot VIX averages 14. During
2007-2013, these metrics were 53% and 24, respectively. Since 1990 the two bear markets and
every major equity market drawdown have occurred within high-volatility regimes

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A Critical Time For the Cyclicality of Volatility


The two transitions from low- to high-volatility regimes (96/97 & 07/08) produced very different
outcomes for U.S. equities

The former preceded the economic cycle and SPX peaks by four years and 3.5 years, respectively.
Those same metrics in the late-00s were just 8 months and 3 months, respectively

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So Whats This Mean For U.S. Equities?


With a sample set of 2, its still not clear which outcome the late 1990s or 2000s is more likely
Either scenario suggests a higher-risk environment with deeper equity market pullbacks, but
whether or not a bear market is underway remains inconclusive from a volatility perspective

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Or Ugly Later
Implications are significant since the last two bear markets saw equities cascade lower for 1.5-2
years with ultimate damage in SPX averaging 53%

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Flatter Kurtosis, Fatter Tails

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Let the Oscillations Begin


Expect the VIX futures curve to cycle from trough to peak with the elevated spot floor in the 15-17
range
Every transition into a trough will test the high-volatility regime hypothesis

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Whats Up At the Long End of the Curve?


In late-2007 there was a delayed reaction at the long-end of the VIX futures curve in recognizing the
regime shift

Now were a bit surprised to see longer-dated VIX futures below 2007-2012 trough levels

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Particularly Given Scarcity of Vol Sellers


Many factors can explain shifts in net VIX futures positioning including trading against VIX-linked
ETPs

But lower longer-dated IV levels against seemingly less liquidity is curious as is aggressive declines in
implied correlation and vol of vol

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Vol of Vol and Implied Correlation Back to Troughs


Along with levels at the back end of the VIX futures curve, vol of vol via VVIX has taken a curious dive
of late

VVIX doesnt display the same discipline as implied volatility over cycles but this phenomena needs to
be watched closely

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Vol Lower, Equities Higher, For Now


Relative to the six months of this high-vol regime the 30 ETPs we track in our Cross-Asset Monitor are
generally in the 50%-70% range for ranking of 3-month at-the-money implied volatility

We expect a shift leftward in the graph below which suggests plenty of potential energy to maintain
recent upward momentumbut only for a few more weeks

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Stability, Then Instability


We havent seen enough shocks in this regime to gauge periodicity so the next several weeks are a
matter of balancing upside convexity against adding hedges and long volatility exposure

Worst performers since the August highs have been the best-performers on this bounce. But dont
lose sight of this decline in volatility being cyclical

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Our 2016 Themes


Three themes from our December 8, 2015 note Looking Forward to 2016
* Dust off the systematic hedging strategies
* Get re-acquainted with the concept of tail-risk
* Revisit strategies that extract elevated implied volatility such as covered call writing

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Hedge Systematically and Cover Tails


Even if a late-1990s type scenario unfolds and the bull market that began in March 2009
continues for another couple or few years, pullbacks relative to the 2012-2015 period will be
sharper and equities will remain vulnerable to higher-magnitude shocks
Our starting point for systematic hedging is to own 3-month index puts or put spreads partially
financed by the sale of 1-2 month covered calls on individual stocks in the portfolio
This strategy resembles the CBOE S&P 500 95-110 Collar Index (CLL)
We additionally like covering tails via VIX and volatility-linked ETPs (VXTH)
VXX was favored in the low-volatility regime of the last few years given roll yield
characteristics but VIX may be more attractive going forward
We avoid a go-to long-volatility structure via VIX its very much client-dependent

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Extract Volatility Risk Premium


Its prime time to extract volatility risk premium and deploy tactical listed options trading strategies

With the baseline for spot VIX and the short end of the VIX futures curve structurally elevated,
monetization is attractive and should be for the duration of the regime
Look at covered call and covered put writing strategies to exploit this
Other dormant equity and cross-asset volatility trading strategies are likely to re-emerge
For example, how to manage our view that tactical long exposure should now exist
concurrently with layering hedges and long volatility exposure: want to manage that via upside
convexity in April tenor versus protection in May/June

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PS1 - ECB/Fed Ahead


Ahead of ECB meeting this week V2X/VIX spread is in 82nd percentile relative to the past 5 years
And SX5E/SPX ratio at multi-year low. Long directionally via April EWG calls outright

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PS2 Gold/GLD Long Via Upside Skew

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PS3 MP Cycles Are Not Inherently Destabilizing


But Fed tightening does historically trigger higher volatility around the event with the S&P 500 Index
declining 4.2% at the 3-month market before recovering to +3.5% after six months

And note that the 1999 tightening cycle occurred within a high-volatility regime

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PS4 - Screening For Events


Event Screen: 30D & 60D Skew, 90D/30D Term Structure, OI Put/Call Ratio and 30D Change, Total OI 30D Change
(in order of six-factor, weighted score; market cap > $500mm, options open interest > 20k, pharmaceutical/biotech industry group excluded)

Rank

Ticker

Name

GICS Industry Group

Spot ($)

Cons. PT
($)

Spot
Spread to
200D MA
(%)

Spot
Spread to
Cons. PT
(%)

90D ATM
IV %-ile
Rank (vs.
12M, %)

Normal.
Normal.
30D
60D
90%/110 90%/110
% Skew
% Skew
(%)
(%)

Normal.
30D/90D
Term
Struct. Put/Call OI
(%)
Ratio

Total OI
30D
Change
(%)

Put/Call OI
Days to
Ratio 60D
Expected
Change Total Open Earnings
(bps)
Interest
Date

LGF

Lions Gate Entertainment Corp

Media

23.14

30.40

(32.45)

31.37

93.20

8.94

7.05

0.17

0.23

75.84

(1.04)

59,144

73

ISIL

Intersil Corp

Semiconductors & Semiconductor

13.49

14.60

9.15

8.23

21.21

(17.63)

(6.95)

(11.80)

0.20

329.53

(0.31)

26,193

51

TAHO

Tahoe Resources Inc

Materials

9.88

11.48

4.85

16.18

65.13

(1.02)

0.24

(3.79)

0.06

56.31

(0.01)

21,467

PVG

Pretium Resources Inc

Materials

5.68

9.57

5.95

68.69

59.52

(2.84)

(1.95)

(7.77)

0.31

115.36

(0.01)

24,045

10

BOX

Box Inc

Software & Services

12.38

18.83

(10.74)

52.13

76.69

(4.74)

(1.47)

(8.19)

0.29

85.72

0.12

48,864

CRZO

Carrizo Oil & Gas Inc

Energy

26.52

34.96

(25.91)

31.83

84.31

11.22

8.01

(3.57)

0.42

(15.61)

(0.64)

20,568

60

CENX

Century Aluminum Co

Materials

8.46

5.75

33.95

(32.03)

69.57

(9.26)

(13.55)

(5.37)

0.30

32.11

(0.25)

36,317

52

DYN

Dynegy Inc

Utilities

11.66

22.45

(43.48)

92.58

85.41

(3.95)

(6.13)

3.30

0.14

111.82

(0.01)

43,085

58

GSAT

Globalstar Inc

Telecommunication Services

1.39

5.50

(22.26)

297.11

92.53

0.13

(2.41)

5.78

0.23

(7.70)

(0.01)

60,202

59

10

TIVO

TiVo Inc

Software & Services

8.14

13.39

(11.12)

64.48

27.96

(3.93)

(2.30)

(0.40)

0.59

(11.24)

(0.16)

34,193

78

11

ASNA

Ascena Retail Group Inc

Retailing

9.93

14.00

(17.36)

40.99

87.83

6.49

5.46

3.52

0.36

(47.39)

(0.63)

102,369

85

12

CIEN

Ciena Corp

Technology Hardware & Equipmen

17.04

23.81

(23.86)

39.72

76.36

19.56

13.17

12.86

0.38

(6.35)

(0.30)

96,166

87

13

BBRY

BlackBerry Ltd

Technology Hardware & Equipmen

8.09

8.00

3.96

(1.11)

45.58

2.29

0.75

(11.70)

0.43

(40.30)

(0.06)

481,090

25

14

EGO

Eldorado Gold Corp

Materials

3.68

3.47

9.26

(5.82)

88.53

10.39

5.84

(0.49)

0.16

(33.15)

(0.20)

69,982

16

15

TRP

TransCanada Corp

Energy

37.18

40.71

4.51

9.49

64.56

8.72

16.83

1.34

0.24

18.02

0.02

32,140

56

16

KGC

Kinross Gold Corp

Materials

3.07

2.74

50.16

(10.47)

79.52

(5.04)

(1.57)

(2.15)

0.52

1.20

(0.01)

314,061

64

17

PAAS

Pan American Silver Corp

Materials

10.64

8.84

41.80

(16.86)

58.31

5.99

4.11

(0.84)

0.31

(4.58)

(0.02)

81,012

65

18

DRII

Diamond Resorts International

Consumer Services

23.70

36.40

(10.18)

53.62

92.01

9.58

11.15

(13.92)

0.52

(0.60)

126,787

51

19

GRPN

Groupon Inc

Retailing

4.93

3.71

23.75

(24.74)

97.87

(4.72)

0.38

5.61

0.43

(19.66)

0.03

156,079

57

20

OLN

Olin Corp

Materials

16.52

19.33

(18.67)

17.03

85.56

12.53

7.25

2.87

0.40

(33.53)

(1.62)

26,048

49

21

SGMS

Scientific Games Corp

Consumer Services

9.99

10.15

(9.22)

1.60

70.19

4.55

4.01

0.78

0.03

(19.00)

(0.09)

296,506

59

22

SWHC

Smith & Wesson Holding Corp

Consumer Durables & Apparel

26.03

30.29

39.18

16.37

72.93

13.06

9.36

9.73

0.44

(7.02)

0.02

52,385

102

23

SHAK

Shake Shack Inc

Consumer Services

41.51

41.80

(17.08)

0.70

31.09

0.01

1.85

(8.65)

0.70

36.51

(0.01)

29,353

24

SUNE

SunEdison Inc

Semiconductors & Semiconductor

1.85

5.29

(85.41)

185.70

99.67

6.25

3.69

(13.87)

0.62

(31.98)

0.08

995,266

15

25

OI

Owens-Illinois Inc

Materials

15.00

17.11

(24.04)

14.07

85.89

9.78

9.95

3.54

0.39

182.16

(0.06)

20,702

56

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Cross-Asset ETF Monitor

03/02/16

ETF

Vl

FI

Commod.

FX

Global Equities

U.S. Groups

U.S. Sectors

U.S. Indices

Symb

Performance

Name

Spot

1-Day
Change
(%)

5-Day
Change
(%)

6-Month
Change
(%)

Implied Volatility, Skew & Term Structure

YTD
Change
(%)

Spot
Relative to
200D MA
(%)
9-Day RSI

%-ile Rank Relative to 6-Months


1-Year/33-Month
ATM IV
(%)

3-Month
ATM IV

3-Month
90%/110
% Skew

Month
Term
Structure

Open Interest & Put/Call Ratio

%-ile Rank Relative to1-Year/33-Years


3-Month
ATM IV

3-Month
90%/110
% Skew

Month
1-Week OI 1-Month
Put/Call OI Put/Call OI
Term
Change
OI Change Put/Call OI
Ratio
Ratio
Structure
(%)
(%)
Ratio
Week Ago Month Ago

DIA

SPDR Dow Jones Industrial Aver

167.62

(0.19)

1.8

2.5

(3.7)

(2.5)

64.5

17.5

50.8

71.3

51.6

91.1

94.8

13.8

1.4

1.4

0.8

0.8

0.7

IWM

iShares Russell 2000 ETF

104.70

0.44

3.0

(8.1)

(7.0)

(9.1)

70.3

21.2

53.2

57.1

50.0

88.3

89.2

18.8

3.9

(7.0)

2.5

2.6

2.1

QQQ

Powershares QQQ Trust Series 1

105.24

(0.63)

2.6

1.3

(5.9)

(2.6)

66.5

21.3

53.2

67.3

51.6

91.6

94.3

13.2

4.3

11.4

1.9

1.8

1.5

SPY

SPDR S&P500 ETF Trust

197.29

(0.07)

2.1

1.0

(3.2)

(2.6)

66.4

18.4

54.7

74.4

45.3

91.5

95.3

10.4

3.9

(5.5)

2.0

1.9

1.8

XLB

Materials Select Sector SPDR F

42.30

(0.63)

3.3

(0.8)

(2.6)

(4.9)

68.1

22.4

53.9

27.2

53.2

91.7

73.0

11.3

2.2

19.9

2.2

2.3

3.3

XLE

Energy Select Sector SPDR Fund

57.50

1.10

1.2

(11.1)

(4.7)

(13.3)

59.4

30.8

68.1

26.4

42.9

93.5

46.9

12.4

2.3

(4.6)

0.9

0.9

1.0

XLF

Financial Select Sector SPDR F

21.84

0.48

4.6

(5.0)

(8.4)

(7.6)

63.9

23.0

76.8

74.4

35.0

95.8

95.6

7.1

9.6

11.7

1.6

2.2

2.2

XLI

Industrial Select Sector SPDR

52.97

(0.34)

2.5

3.8

(0.1)

(0.1)

70.6

19.1

56.3

79.9

46.1

90.5

95.4

10.8

(6.4)

129.1

2.0

1.9

2.0

XLK

Technology Select Sector SPDR

41.98

(0.33)

2.7

5.3

(2.0)

0.2

68.5

20.1

53.9

37.4

53.2

91.9

87.4

15.3

(3.2)

(0.9)

0.5

0.5

0.5

XLP

Consumer Staples Select Sector

51.23

(0.01)

(0.0)

9.1

1.5

4.1

61.5

14.8

46.1

10.6

51.6

89.5

64.6

35.9

13.8

43.9

2.5

2.1

2.3

XLU

Utilities Select Sector SPDR F

45.58

0.33

(3.0)

10.3

5.3

4.6

48.1

16.8

65.0

53.9

29.5

86.1

76.2

40.1

(0.1)

17.5

1.6

1.5

1.3

XLV

Health Care Select Sector SPDR

67.41

(0.25)

1.2

(3.8)

(6.4)

(5.5)

60.4

18.8

35.0

10.6

76.0

87.0

66.2

40.7

2.7

25.2

1.8

1.7

1.8

XLY

Consumer Discretionary Select

75.98

(0.71)

2.4

1.8

(2.8)

(1.2)

72.4

20.2

60.2

0.0

33.5

92.7

73.4

13.4

(0.9)

29.0

1.7

1.7

1.2

GDX

Market Vectors Gold Miners ETF

18.89

2.93

(1.2)

38.6

37.6

22.0

55.9

50.2

77.6

5.1

40.6

95.8

11.8

30.6

2.7

40.5

0.6

0.6

0.6

GDXJ

Market Vectors Junior Gold Min

25.42

3.18

0.7

29.5

32.3

19.7

57.9

51.6

71.3

51.6

28.0

74.2

65.4

40.7

0.4

32.1

0.7

0.7

0.9

IYR

iShares U.S. Real Estate ETF

73.29

0.44

3.9

4.9

(2.4)

(0.0)

72.3

17.8

51.6

83.9

54.7

85.7

96.6

23.6

18.6

24.8

1.8

2.0

2.2

OIH

Market Vectors Oil Service ETF

24.23

1.67

3.3

(19.9)

(8.4)

(18.9)

63.1

40.2

72.8

84.7

57.1

94.9

93.7

13.9

(0.3)

(13.4)

0.9

1.0

1.0

XHB

SPDR S&P Homebuilders ETF

31.46

(0.38)

2.0

(12.9)

(8.0)

(10.1)

69.9

23.9

66.5

47.6

58.7

79.1

90.7

39.1

(1.2)

(18.4)

1.0

0.9

0.5

XME

SPDR S&P Metals & Mining ETF

17.46

6.50

10.7

(11.3)

16.8

(7.5)

75.8

39.8

62.6

2.0

68.9

93.3

2.6

38.2

(0.7)

(17.5)

0.7

0.7

0.5

XOP

SPDR S&P Oil & Gas Exploration

25.02

3.13

3.8

(31.8)

(17.2)

(31.7)

53.1

48.5

70.5

61.8

96.5

92.4

38.6

31.8

13.9

1.7

1.1

1.0

1.3

XRT

SPDR S&P Retail ETF

43.68

(0.11)

2.4

(6.0)

1.0

(4.4)

79.7

22.7

64.2

69.7

54.7

93.7

88.4

24.0

29.1

23.0

3.9

2.9

3.6

EEM

iShares MSCI Emerging Markets

31.39

0.86

3.7

(4.9)

(2.5)

(9.8)

66.0

26.7

64.2

58.7

41.3

93.5

91.0

11.6

4.5

6.0

1.3

1.3

1.4

EFA

iShares MSCI EAFE ETF

54.89

0.42

2.7

(6.7)

(6.5)

(9.3)

61.2

19.7

58.7

82.3

43.7

92.0

96.6

11.8

3.9

(2.8)

1.8

1.8

1.6

EWA

iShares MSCI Australia ETF

18.12

2.69

3.1

(0.4)

(4.4)

(6.3)

59.3

28.3

77.6

8.3

13.0

96.1

25.0

2.8

0.5

(1.4)

4.2

4.3

4.5

EWG

iShares MSCI Germany ETF

23.99

(0.29)

2.5

(7.9)

(8.4)

(10.1)

59.8

23.7

76.0

61.0

15.4

95.1

48.6

3.8

2.3

51.2

0.5

0.5

0.9

EWJ

iShares MSCI Japan ETF

11.27

1.03

3.0

(4.4)

(7.1)

(7.6)

58.3

22.6

68.9

85.4

29.5

90.0

97.4

9.2

(0.0)

39.8

0.9

0.9

1.0

EWY

iShares MSCI South Korea Cappe

47.84

0.31

2.1

0.4

(3.7)

(6.7)

59.3

24.5

72.8

84.7

50.0

94.4

97.3

10.5

(0.4)

22.2

2.1

2.2

1.4

EWZ

iShares MSCI Brazil Capped ETF

21.60

2.27

5.9

(9.8)

4.4

(14.5)

66.7

43.5

57.9

69.7

74.4

91.5

73.3

31.8

6.1

2.6

0.8

0.9

0.9

FXI

iShares China Large-Cap ETF

31.60

1.56

3.8

(8.9)

(10.5)

(17.7)

62.7

32.2

65.8

76.8

28.0

93.9

96.0

6.6

2.1

(12.4)

1.4

1.4

1.8

RSX

Market Vectors Russia ETF

14.75

(0.27)

2.9

(7.1)

0.6

(9.3)

67.1

41.6

83.1

75.2

15.4

88.6

63.0

19.2

0.9

(15.6)

1.5

1.5

1.0

FXA

CurrencyShares Australian Doll

72.39

1.60

0.5

2.8

(0.8)

(0.7)

54.3

13.2

94.9

14.6

25.6

97.3

3.8

29.1

4.0

18.7

2.8

2.7

1.8

FXE

CurrencyShares Euro Trust

105.96

0.02

(1.6)

(3.8)

(0.4)

(2.2)

29.2

11.2

65.0

53.2

97.2

82.6

14.9

47.4

2.0

15.8

1.8

1.8

2.1

FXY

CurrencyShares Japanese Yen Tr

85.10

0.52

(1.6)

5.5

5.5

6.0

50.5

12.5

91.7

7.5

12.2

87.1

1.4

4.6

8.8

47.5

2.7

2.4

1.5

UUP

PowerShares DB US Dollar Index

25.55

(0.15)

1.0

2.0

(0.4)

1.0

65.4

9.3

61.0

65.0

98.0

80.4

46.7

48.4

(0.3)

15.2

0.6

0.6

0.6

GLD

SPDR Gold Shares

118.59

0.81

0.8

9.2

16.9

9.2

60.4

19.9

90.9

6.7

9.1

88.2

1.1

26.3

0.9

34.5

0.4

0.4

0.3

SLV

iShares Silver Trust

14.27

0.71

(1.7)

1.8

8.2

(0.6)

44.3

25.2

31.1

5.1

87.0

29.7

1.9

90.4

3.1

28.9

0.3

0.3

0.3

UNG

United States Natural Gas Fund

6.03

(3.24)

(7.6)

(51.6)

(30.5)

(44.7)

28.2

48.6

74.4

54.7

37.4

86.5

60.4

31.0

13.4

60.4

0.5

0.5

0.7

USO

United States Oil Fund LP

8.97

0.90

4.4

(40.6)

(18.5)

(36.8)

60.0

55.8

77.6

31.9

19.3

96.2

11.2

6.4

(1.6)

(3.5)

0.7

0.7

0.7

HYG

iShares iBoxx $ High Yield Cor

80.34

(0.70)

2.6

(6.5)

(0.3)

(4.8)

80.5

11.1

45.3

59.5

64.2

88.3

57.5

46.6

0.9

4.9

1.5

1.4

1.1

TLT

iShares 20+ Year Treasury Bond

128.64

0.27

(2.0)

6.3

6.7

5.1

39.3

14.4

50.8

9.1

16.1

65.0

4.0

11.7

(0.7)

0.3

0.9

0.8

0.9

VXX

iPATH S&P 500 VIX Short-Term F

23.11

0.13

(7.6)

(15.9)

15.0

9.7

33.2

75.2

20.1

54.7

67.3

78.6

67.5

34.2

(0.7)

(4.7)

1.4

1.4

1.3

Source: MKM Partners & Bloomberg.

March 9, 2016

28

MKM Partners LLC

27

Derivatives Strategy: The Volatility Regime in Pictures

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March 9, 2016

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MKM Partners LLC

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Derivatives Strategy: The Volatility Regime in Pictures


Important Disclosures
The Primary Analyst certifies that the views expressed in this research report about securities and issuers accurately reflect his/her personal views. The Primary Analyst also certifies that there has not been, is not, and
will not be direct or indirect compensation from MKM Partners LLC or the subject company(ies) related to the specific recommendations or views in this report.
The Primary Analyst (including his/her household) does not have a financial interest in the securities of the subject company(ies), nor does MKM Partners LLC habitually deal as principal in transactions in the securities
referred to herein (or other instruments related thereto), including positions and transactions contrary to any recommendations contained herein held by the research analyst/household. The Firm has not engaged in
transactions with issuers identified in the report. MKM Partners LLC does not make a market in the subject company(ies). The subject company(ies) is(are) not currently, nor for the past 12 months was(were), a client(s)
of the Firm. The research analyst does not serve as an officer, director or advisory board member of the company(ies) and receives no compensation from it(them).
This report has been prepared by MKM Partners LLC. It does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained in this report may not be suitable
for all investors. Although the information contained herein has been obtained from recognized services, issuer reports or communications, or other services and sources believed to be reliable, its accuracy or
completeness cannot be guaranteed. This report may contain links to third-party websites, and MKM Partners LLC is not responsible for their content or any linked content contained therein. Such content is not part of
this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or affiliation with MKM Partners LLC; access to these links is at your own risk.
Compendium report: Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research. Please go to https://research.mkmpartners.com/ to access our
Research Repository.
Any opinions, estimates or projections expressed herein may assume some economic, industry and political considerations and constitute current opinions, at the time of issuance, that are subject to change. Any
quoted price is as of the last trading session unless otherwise noted. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned in this report.
Investors in such securities and instruments, including ADRs, effectively assume currency risk.
This information is being furnished to you for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Investors must make their own determination of the
appropriateness of an investment in any securities referred to herein based on the applicable legal, tax and accounting considerations and their own investment strategies. By virtue of this publication, neither the Firm
nor any of its employees shall be responsible for any investment decision. This information is intended for institutional clients only.
This communication may involve technical and/or event-driven analysis. Technical analysis solely examines the past trading history of a security to arrive at anticipated market fluctuations. Technical and event-driven
analyses do not consider the fundamentals of an underlying security and therefore offer an incomplete picture of the value or potential value of a security. Customers should not rely on technical or event-driven analysis
alone in making an investment decision, but should review all publicly available information regarding the security(ies), including, but not limited to, the fundamentals of the underlying security(ies) and other information
provided in any filings with the Securities Exchange Commission (SEC).
MKM Partners LLC has multiple analysts, and their views may differ from time to time. We encourage readers to call with any questions. This report may contain a short-term trading idea or recommendation that
highlights a specific near-term catalyst or event that is anticipated to have a short-term effect on the equity securities of the subject company(ies). Short-term trading ideas and recommendations are different from and
do not affect a stock's fundamental equity rating, which reflects a longer-term total return expectation. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity
rating. Any discussions of legal proceedings or issues are not and do not express any, legal conclusion, opinion or advice; investors should consult their own legal advisers as to issues of law relating to the subject
matter of this report.
Regarding the use of instant messages (IMs) and e-mail, you consent to the following: IMs or e-mail sent from or received by MKM Partners LLC employees are presumed to contain confidential or proprietary
information and are intended only for the designated recipient(s). If you are not the designated recipient, please inform the sender that you received this e-mail or IM in error and do not use, copy or disseminate its
contents. MKM Partners LLC and its analysts may from time to time make informal technical, fundamental and economic comments on IM and e-mail.
Additional information on all of our research calls is available upon request. MKM Partners LLC is a U.S. registered broker-dealer and a member of FINRA and SIPC.
Risks: Risks associated with the achievement of revenue and earnings projections and price targets include, but are not limited to, unforeseen macroeconomic and/or industry events that weaken demand for the subject
companys products or services, product obsolescence, changes in investor sentiment regarding the company or industry, the companys ability to retain or recruit competent personnel and market conditions. For a
complete discussion of risk factors that could affect the market price of the securities, refer to the most recent 10-Q or 10-K filed with the SEC.

March 9, 2016

30

MKM Partners LLC

29

Derivatives Strategy: The Volatility Regime in Pictures


Option Risk Statements and Disclosures
The material in this presentation has been prepared by MKM Partners LLC, a U.S. registered broker-dealer. This material is provided for informational purposes only and is not an offer or solicitation of any
investments or investment services. Not all investments or investment services described are available in all U.S. states. This material is available only to institutional investors.
Expiration Process and Risks Please note that the following items apply to the monthly index and equity option expiration process, and the resulting assignment or exercise of options that are in-themoney:
1. Automatic exercise is limited: All expiring equity options closing in-the-money .01 or more will be eligible for automatic exercise per the contract terms of standardized options issued by the Options
Clearing Corporation (OCC). Index options will be exercised automatically if they are in-the-money by any amount.
2. You may be required to request exercise of valuable options: You should note that long equity options that are in-the-money less than .01, or out-of-the money, are not automatically exercised. These
options may be exercised, but you must specifically request exercise of these options by 4:00pm ET on the last day of trading before expiration.
3. Consider the risk of exercise or assignment: You should review your positions and consider whether your account can afford to take assignment (or exercise) based on your current equity. You may need
to close expiring positions prior to end of the market day in order to avoid risk, or in order to retain the profit from an in-the-money position prior to expiration. In addition, please consider the possibility that
short options positions may be exercised against you by the long holder, even if the option is out-of-the money.
4. Spreads face unique risks during expiration: Expiring spreads may require action if the long leg is out-of-the money less than .01, or out-of-the-money while the short leg is in-the-money. Although we use
our best efforts to exercise offsetting, expiring long options, the customer is ultimately responsible for taking action on such positions and for the risks associated with any unhedged spread leg expiring inthe-money. In the event that you do not wish to exercise an expiring long leg, you must notify us by 4:00pm ET in order to prevent the possibility that we will exercise this long position on your behalf.
5. The assignment process: According to the policy and practice of our clearing agents, assignments are distributed on a random basis among all holders of eligible options among the accounts carried on
their books. Please contact us if you need more information about this process. For any questions relating to the exercise process or regarding expiring options, please contact our Trading Desk at 203-8619060.
Spread Trade Risk Disclosure Option traders must understand the additional risks associated with this type of trading. While it is generally accepted that spread trading may reduce the risk of loss of the
trading of the outright purchase of a standardized option contract, an investor/trader must understand that the risk reduction can lead to other risks.
1. Early exercise and assignment can create risk and loss. Spreads are subject to early exercise or assignment that can remove the very protection that the investor/trader sought. This can lead to margin
calls and greater losses than anticipated when the trade was entered.

2. Execution of spread orders is not held and discretionary. Spreads are not standardized contracts as are exchange-traded puts and calls. Spreads are the combination of standardized put and call
contracts. There is no spread market in securities that is subject to such benchmarks such as time and sales or NBBO (National Best Bid/Offer), and therefore the market cannot be held to a price.
3. Spreads are executed differently from legged orders. Spreads are used by strategists as examples of risk protection, profit enhancement and as a basis for results and return on investments. However,
these strategies assume that the trade can actually be executed as a spread, when market forces may and can make the actual execution impossible. Spreads are bona-fide trades and not legged or
paired individual separate trades. For example: option prices on cross-markets are misleading for the spread trader. An option may be offered on one exchange and bid on another exchange that can lead
the trader to believe that their spread trade should be filed, when, in fact, the bids and offers must be on the same exchange as all bona-fide spreads are routed on one exchange.
4. Spreads are entered on a single exchange and are acted upon by a market maker. Spreads are executed at the discretion of a market maker and, when cancelled or filled, require that the market maker
take manual action and require manual reporting at times. Delays for reporting of fills and cancels may create additional risks in fast or changing markets.
5. Options involve risk and are not suitable for all investors. Please read the Characteristics and Risks of Standardized Options available at http://www.optionsclearing.com/publications/risks/riskchap1.jsp
prior to opening an account.
6. Past performance is no guarantee of future returns.
Member: FINRA & SIPC

March 9, 2016

31

MKM Partners LLC

30

Derivatives Strategy: The Volatility Regime in Pictures


Distribution of Ratings
MKM Partners, Equity Research
Investment Banking
Serv./Past 12 Mos.
Rating
BUY [BUY]
HOLD [NEUTRAL]
SELL [SELL]

Count

Percent

Count

Percent

67

49.26

63

46.32

4.41

Explanation of MKM Partners Rating System


Buy Security is expected to appreciate 15% or more on an absolute basis in the next 12 months.
Neutral Security is not expected to significantly appreciate or depreciate in value in the next 12 months.
Sell Security is expected to depreciate 15% or more on an absolute basis in the next 12 months.
Analyst Certification
I, Jim Strugger, certify that the views expressed in this research report about securities and issuers accurately reflect my personal views.
I further certify that there has not been, is not, and will not be direct or indirect compensation from MKM Partners LLC or the subject
company(ies) related to the specific recommendations or views in this report.
Important Disclosures
Jim Strugger (including his/her/their household) does not have a financial interest in the securities of the subject company(ies). The Firm
has not engaged in transactions with issuers identified in the report. MKM Partners LLC does not make a market in the subject company(ies).
The subject company(ies) is(are) not currently, nor for the past 12 months was(were), a client(s) of the Firm. The research analyst does
not serve as an officer, director or advisory board member of the company(ies) and receives no compensation from it(them).
This report has been prepared by MKM Partners LLC. It does not constitute an offer or solicitation of any transaction in any securities
referred to herein. Any recommendation contained in this report may not be suitable for all investors. Although the information contained
herein has been obtained from recognized services, issuer reports or communications, or other services and sources believed to be reliable,
its accuracy or completeness cannot be guaranteed. This report may contain links to third-party websites, and MKM Partners LLC is not
responsible for their content or any linked content contained therein. Such content is not part of this report and is not incorporated by
reference into this report. The inclusion of a link in this report does not imply any endorsement by or affiliation with MKM Partners LLC;
access to these links is at your own risk.
Any opinions, estimates or projections expressed herein may assume some economic, industry and political considerations and constitute
current opinions, at the time of issuance, that are subject to change. Any quoted price is as of the last trading session unless otherwise
noted. Foreign currency rates of exchange may adversely affect the value, price or income of any security or financial instrument mentioned
in this report. Investors in such securities and instruments, including ADRs, effectively assume currency risk.
This information is being furnished to you for informational purposes only, and on the condition that it will not form a primary basis for any
investment decision. Investors must make their own determination of the appropriateness of an investment in any securities referred to
herein based on the applicable legal, tax and accounting considerations and their own investment strategies. By virtue of this publication,
neither the Firm nor any of its employees shall be responsible for any investment decision. This information is intended for institutional
clients only.
This communication may involve technical and/or event-driven analysis. Technical analysis solely examines the past trading history of
a security to arrive at anticipated market fluctuations. Technical and event-driven analyses do not consider the fundamentals of an
underlying security and therefore offer an incomplete picture of the value or potential value of a security. Customers should not rely on
technical or event-driven analysis alone in making an investment decision, but should review all publicly available information regarding
the security(ies), including, but not limited to, the fundamentals of the underlying security(ies) and other information provided in any
filings with the Securities Exchange Commission (SEC).
MKM Partners LLC has multiple analysts, and their views may differ from time to time. We encourage readers to call with any questions. This
report may contain a short-term trading idea or recommendation that highlights a specific near-term catalyst or event that is anticipated to
have a short-term effect on the equity securities of the subject company(ies). Short-term trading ideas and recommendations are different
from and do not affect a stock's fundamental equity rating, which reflects a longer-term total return expectation. Short-term trading ideas
and recommendations may be more or less positive than a stock's fundamental equity rating. Any discussions of legal proceedings or

March 9, 2016

32

MKM Partners LLC

Derivatives Strategy: The Volatility Regime in Pictures


issues are not and do not express any, legal conclusion, opinion or advice; investors should consult their own legal advisers as to issues
of law relating to the subject matter of this report.
Regarding the use of instant messages (IMs) and e-mail, you consent to the following: IMs or e-mail sent from or received by MKM Partners
LLC employees are presumed to contain confidential or proprietary information and are intended only for the designated recipient(s).
If you are not the designated recipient, please inform the sender that you received this e-mail or IM in error and do not use, copy or
disseminate its contents. MKM Partners LLC and its analysts may from time to time make informal technical, fundamental and economic
comments on IM and e-mail.
Additional information on all of our research calls is available upon request. MKM Partners LLC is a U.S. registered broker-dealer and a
member of FINRA and SIPC.
OptionRisk Statements and Disclosures
The material in this presentation has been prepared by MKM Partners LLC, a U.S. registered broker-dealer. This material is provided for
informational purposes only and is not an offer or solicitation of any investments or investment services. Not all investments or investment
services described are available in all U.S. states. This material is available only to institutional investors.
Expiration Process and Risks Please note that the following items apply to the monthly index and equity option expiration process, and
the resulting assignment or exercise of options that are in-the-money:
1. Automatic exercise is limited: All expiring equity options closing in-the-money .01 or more will be eligible for automatic exercise per the
contract terms of standardized options issued by the Options Clearing Corporation (OCC). Index options will be exercised automatically
if they are in-the-money by any amount.
2. You may be required to request exercise of valuable options: You should note that long equity options that are in-the-money less than .01,
or out-of-the money, are not automatically exercised. These options may be exercised, but you must specifically request exercise of these
options by 4:00pm ET on the last day of trading before expiration.
3. Consider the risk of exercise or assignment: You should review your positions and consider whether your account can afford to take
assignment (or exercise) based on your current equity. You may need to close expiring positions prior to end of the market day in order
to avoid risk, or in order to retain the profit from an in-the-money position prior to expiration. In addition, please consider the possibility
that short options positions may be exercised against you by the long holder, even if the option is out-of-the money.
4. Spreads face unique risks during expiration: Expiring spreads may require action if the long leg is out-of-the money less than .01, or
out-of-the-money while the short leg is in-the-money. Although we use our best efforts to exercise offsetting, expiring long options, the
customer is ultimately responsible for taking action on such positions and for the risks associated with any unhedged spread leg expiring
in-the-money. In the event that you do not wish to exercise an expiring long leg, you must notify us by 4:00pm ET in order to prevent the
possibility that we will exercise this long position on your behalf.
5. The assignment process: According to the policy and practice of our clearing agents, assignments are distributed on a random basis
among all holders of eligible options among the accounts carried on their books. Please contact us if you need more information about this
process. For any questions relating to the exercise process or regarding expiring options, please contact our Trading Desk at 203-861-9060.
Spread Trade Risk Disclosure Option traders must understand the additional risks associated with this type of trading. While it is generally
accepted that spread trading may reduce the risk of loss of the trading of the outright purchase of a standardized option contract, an
investor/trader must understand that the risk reduction can lead to other risks.
1. Early exercise and assignment can create risk and loss. Spreads are subject to early exercise or assignment that can remove the very
protection that the investor/trader sought. This can lead to margin calls and greater losses than anticipated when the trade was entered.
2. Execution of spread orders is not held and discretionary. Spreads are not standardized contracts as are exchange-traded puts and
calls. Spreads are the combination of standardized put and call contracts. There is no spread market in securities that is subject to such
benchmarks such as time and sales or NBBO (National Best Bid/Offer), and therefore the market cannot be held to a price.
3. Spreads are executed differently from legged orders. Spreads are used by strategists as examples of risk protection, profit enhancement
and as a basis for results and return on investments. However, these strategies assume that the trade can actually be executed as a
spread, when market forces may and can make the actual execution impossible. Spreads are bona-fide trades and not legged or paired
individual separate trades. For example: option prices on cross-markets are misleading for the spread trader. An option may be offered on
one exchange and bid on another exchange that can lead the trader to believe that their spread trade should be filed, when, in fact, the
bids and offers must be on the same exchange as all bona-fide spreads are routed on one exchange.
4. Spreads are entered on a single exchange and are acted upon by a market maker. Spreads are executed at the discretion of a market
maker and, when cancelled or filled, require that the market maker take manual action and require manual reporting at times. Delays for
reporting of fills and cancels may create additional risks in fast or changing markets.
5. Options involve risk and are not suitable for all investors. Please read the Characteristics and Risks of Standardized Options available at
http://www.optionsclearing.com/publications/risks/riskchap1.jsp prior to opening an account.
6. Past performance is no guarantee of future returns.
Member: FINRA & SIPC Mkm
March 9, 2016

33

MKM Partners LLC