Exchange Traded Funds - The Richest of the Rich - Sept. 2009


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Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

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Exchange Traded Funds - The Richest of the Rich - Sept. 2009

  1. 1. U.S. Listed Options Sales Tuesday, September 29, 2009 Market Commentary Ryan Renicker, CFA Derivatives Strategist Richest of the Rich (646) 557-7999 Exchange Traded Funds Despite signs of improving macroeconomic conditions, on thing is clear: the direction and pace of the recovery remains unclear. In other words, the one thing that is clear is investor uncertainty. In the options market, such uncertainty can be quantified by analyzing the degree to which securities’ options prices are priced “rich” or “cheap”. We deem options as “rich” when options implied volatility spread – which is the difference between implied volatility and realized volatility over a defined period of time – is at least one standard deviation above the average of where this spread has traded during, say, a six month, one year, or two year period. The current market environment, however, is much different than it was even one year ago: there is a new Presidential administration, new economic policies, an entirely new regulatory environment (TARP, TALF) as well as a host of other geopolitical changes (policies in the Middle East). Because of this, I will scan for options using the most recent 6 month period (roughly in line with the amount of time that has transpired since the broader market rally began in early arch of this year). Accordingly, I believe the following list of ETFs are trading relatively rich. Consider expressing directional opinions by selling options on these ETFs and / or initiating short gamma positions if you believe these sectors / asset classes are likely to trade range bound in the near term.Figure 1: ETFs Having Relatively “Rich” Front Month Options.Source: Bloomberg and Newedge U.S. Listed Options Sales. Date of first use: 09/29/2009 © Newedge USA, LLC - September 2009 All rights reserved. "Disclaimer Attached" 1
  2. 2. Newedge Group is authorised by the Banque de France. Newedge Group (UK Branch) is authorized by the CommissionBancaire and Autorité des Marchés Financiers in France and is subject to limited regulation by the Financial Services Authority(the FSA) for the conduct of its UK business. Details on the extent of our regulation by the FSA are available from us on request.Newedge Group (Frankfurt Branch) is regulated by BaFIN. Newedge Group (Madrid Branch) is regulated by MEFF. NewedgeGroup (Dubai) is regulated by the Dubai Financial Services Authority). This information is not intended for distribution to “RetailCustomers” (as defined under MiFID).Subject to the nature and contents of this report, the investments described herein are subject to fluctuations in price and/orvalue and investors may get back less than originally invested. Certain high-volatility investments can be subject to sudden andlarge falls in value that could equal or exceed the amount invested. The reader is advised that futures and options arespeculative products and the risk of loss can be substantial. Futures spreads are not necessarily less risky than short or longfutures transactions and positions. Consequently only risk capital should be used to trade futures. Accordingly, investors should,before acting on advice, consider the appropriateness of the advice, having regard to their objectives, financial situation andneeds. Newedge Group (UK Branch) accepts no liability whatsoever for any direct, indirect or consequential loss arising from theuse of this report or its content. This report is not to be construed as providing investment services in any jurisdiction where theprovision of such services would be illegal.The opinions, views and forecasts expressed in this report reflect the personal views of the author(s) and do not necessarilyreflect the views of Newedge Group (UK Branch) or any other branch or subsidiary of Newedge Group (collectively, "Affiliates").Newedge Group (UK Branch), its worldwide Affiliates, or any of their employees may, from time to time, have transactions andpositions in, make a market in or effect transactions in any investment or related investment covered by the report. NewedgeGroup (UK Branch) makes no representation or warranty regarding the correctness of any information contained herein, or theappropriateness of any transaction for any person. All references to prices and yields are subject to change without notice. Pastresults are not necessarily an indication of future performance. Nothing herein shall be construed as a recommendation to buy orsell any financial instrument or security. This communication is for information purposes only. Investors should also consider thisreport as only a single factor in making their investment decision. This communication may contain privileged and/or confidentialinformation and is intended only for the use of the individual or entity to which it is addressed. No waiver of confidentiality orprivilege is made by mistransmission. If the reader of this message is not the intended recipient, you are hereby notified that anyunauthorized dissemination, distribution, reading, printing, copying and/or use of this communication are strictly prohibited.THE DISTRIBUTION OF THIS REPORT IN OTHER JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW, ANDPERSONS INTO WHOSE POSSESSION THIS REPORT COMES SHOULD INFORM THEMSELVES ABOUT, AND OBSERVE,ANY SUCH PROHIBITION OR RESTRICTIONS. BY ACCEPTING THIS REPORT YOU AGREE TO BE BOUND BY THEFOREGOING. Date of first use: 09/29/2009 © Newedge USA, LLC - September 2009 All rights reserved. "Disclaimer Attached" 2