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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
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.
MKM Derivatives
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.
March 9, 2016
Average duration has been around 5 years but the low-volatility regime from late-2012 to August
2015 measured just 2 years
March 9, 2016
Prior to the August shock we had expected the low-volatility regime to extend toward the historical
average around 5 years
March 9, 2016
March 9, 2016
March 9, 2016
A Global/Cross-Asset Regime
March 9, 2016
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
March 9, 2016
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
March 9, 2016
10
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
March 9, 2016
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10
March 9, 2016
12
11
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%
March 9, 2016
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12
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14
13
March 9, 2016
15
14
Now were a bit surprised to see longer-dated VIX futures below 2007-2012 trough levels
March 9, 2016
16
15
But lower longer-dated IV levels against seemingly less liquidity is curious as is aggressive declines in
implied correlation and vol of vol
March 9, 2016
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16
VVIX doesnt display the same discipline as implied volatility over cycles but this phenomena needs to
be watched closely
March 9, 2016
18
17
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
March 9, 2016
19
18
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
March 9, 2016
20
19
March 9, 2016
21
20
March 9, 2016
22
21
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
March 9, 2016
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22
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23
March 9, 2016
25
24
And note that the 1999 tightening cycle occurred within a high-volatility regime
March 9, 2016
26
25
Rank
Ticker
Name
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
March 9, 2016
27
1,469.34
26
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
(%)
YTD
Change
(%)
Spot
Relative to
200D MA
(%)
9-Day RSI
3-Month
ATM IV
3-Month
90%/110
% Skew
Month
Term
Structure
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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Contact Us
Headquarters
Stamford CT
New York NY
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PLEASE VISIT OUR WEBSITE, WWW.MKMPARTNERS.COM, FOR MORE DETAILS ON OUR BUSINESS
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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
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Count
Percent
Count
Percent
67
49.26
63
46.32
4.41
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33