What I Have Been Up To

1. Equity Derivative Trade Examples
Frank C. Poerio, CFA
FINRA Series 7 and 63 licensed
March 2010

2. Example #1 – Long-Term Macro Strategy

3. Example #1 – Long-Term Macro Strategy
Macroeconomic Thesis (12/08): Volatility to Return Towards Normalized Levels
• The options market was pricing-in extreme fear due to economic uncertainties.
VIX Index trading around 60
• Wanted to capture the implied volatility component of the options market
irrespective of market direction.
• The result: created a delta-neutral, vega/theta capture strategy, utilizing
equity derivative spread trades, thereby exploiting the heighted volatility
• Structured strategy buy selling multiple legs of SPY call and put spreads,
staggered by expiration date

4. Example #1 – Long-Term Macro Strategy
Potential Risks to Strategy:
• Linear-gains, non-linear losses if improperly hedged
• Gamma risk/maintaining delta-neutrality in a trending market
• Liquidity concerns
• Reemergence of extreme volatility levels if equity and credit markets do not
stabilize.

5. Example #1 – Long-Term Macro Strategy
Snapshot of Proprietary Model (5/09)
Spread Strategy
May 21, 2009
60 90 120 150 180 210 240 270 300 330 360
June 19, 2009 June 30, 2009 July 17, 2009 August 21, 2009 September 18, 2009 September 30, 2009 December 18, 2009 December 31, 2009
Days Remaining 29 40 57 92 120 132 211 224
Calls
40.32% 125 125
37.98% 123
23.76% 110 115 SPY Data Feeds Price Trade Date
21.60% 108 104 Yahoo 87.82 21-May
16.56% 104 114
10.26% 98 96
7.20% 96 S&P 500 888.33 5/21
5.22% 94 95 VIX Index 31.35 5/21
0.23% -2.50% 0.14% -1.09% 0.14% -0.76% -0.47% -0.45%
6.62% -100.00% 7.74% -100.00% 16.72% -100.00% -100.00% -100.00%
89.10
Current SPY -4.60% -100.00% -9.09% -100.00% -12.46% -100.00% -100.00% -100.00%
0.16% 2.50% 0.16% 1.09% 0.10% 0.76% 0.47% 0.45%
5.22% 84 85
7.20% 83 0.12% - 0.14% Watch
10.26% 80 81 0.10% - 0.12% Caution
16.56% 74 68 0.00% - 0.10% Remove and roll position
21.60% 70 78
23.76% 68 65 Initial Cushion Ratio 0.18%
37.98% 55
40.32% 53 62

6. Example #1 – Long-Term Macro Strategy
The Results: +35% Gain
VAMI Chart
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S pread S trate gy SPY VIX Inde x

7. Example #1 – Long-Term Macro Strategy
Why Unwinding Strategy Now?
Because of the Potential for Higher Volatility Due to:
• Concern the equity market’s rally may have outpaced prospects for economic and
earnings growth. Sustaining current growth levels may be difficult in the near-term.
• Investors may be underestimating risks to the global economy. Sovereign
risk may be a recurring theme, i.e. Greece
• Interest rate hike uncertainty
• Unemployment figures
• Impact from unwinding of government’s fiscal stimulus

8. Example #2 – Short-Term Trade

9. Example #2 – Short-Term Trade
Short-Term Trade on a Core Holding (3/03/10)
McDonald’s (MCD) Rationale:
• EPS increased from $3.68 to an estimated $4.10 over the past 5 quarters indicating an
improving growth rate
• Based on operating earnings yield, the company is undervalued when compared to peers
• Continued impressive system-wide sales, especially from international operations. With 32,478
restaurants around the world—57% of them are outside of North America
• Innovative menu offerings; i.e. dollar breakfast menu, McCafe, smoothies this summer, etc.
• Analyst forecasts have recently been raised.
……therefore, will look to capitalize on any pull-back in the stock

10. Example #2 – Short-Term Trade
Short-Term Trade on a Core Holding (3/03/10)
Risks:
• Feb same-store sales may disappoint. Comps may be difficult to beat, especially in U.S.
• For fast food chains, and the entire restaurant industry, the key remains the U.S. economy's
direction. In February, the U.S. unemployment rate remained steady at 9.7%
• Strengthening dollar impacting international sales figures

11. Example #2 – Short-Term Trade
Short-Term Trade on a Core Holding (3/03/10)
How Structured:
• Sold Sep 55 Puts @ 1.00 on 3/03/10 following a pull-back in the stock and an uptick in implied
volatility
• Did not think buying calls was the best play as the stock tends to trade in a tight range
• Chose not to buy downside protection as I would be comfortable having the stock put to me

12. Example #2 – Short-Term Trade
Short-Term Trade on a Core Holding
The Results:
• On Mar. 8, MCD reported February sales results that beat analyst expectations.
Global sales rose 11.2% in February. Asian same-store sales jumped 10.5%—the
most since November 2008—and European same-store sales rose 5.4%.
McDonald's shares rallied following the news
• Sep 55 Puts are currently trading at .63 (bid). Position will be closed prior to 1Q
results in April with a buy-stop at .85

13. Future Ideas?

14. Future Ideas?
• Increased M&A activity as of late, possibly structure straddle on takeover
candidates. Biotech names? Agricultural Producers?
• Eventual return of inflation, however uncertain on timing. Long-term macro
strategy involving commodity producers.
• Bull call spreads on American Tower (AMT) following any short-term
pullback in the stock, especially when approaching the $42 support level.
Cheap way to play smartphone trend through wireless tower operator. Data
consumption is straining carriers. Companies need AMT to relieve networks
and install new technologies such as 4G
• Long volatility protection strategies
• Price skew trades/vertical spreads & Time skew/calendar spreads

15. Contact Information
Frank C. Poerio, CFA
646-246-1814
poerio@gmail.com