November 10, 2015

Daily Strategy Note

1. The Joy of Put Selling

Pravit Chintawongvanich is
the head derivatives What’s less risky: selling puts or buying stock? It depends on the size, of course. But let’s say
strategist at Macro Risk we compare selling one at-the-money put vs. buying 100 shares. Selling put is less risky
Advisors and author of the because in the worst case scenario, I am only obligated to buy 100 shares at the strike price
daily note. – plus I collected a premium (meaning my loss will never be as bad as the long stock).
[email protected]
212-287-2640 But what performed better over the past 29 years? The results might surprise some. Since
1986, selling monthly at-the-money puts has outperformed buy and hold – and by a large
margin on a risk-adjusted basis. Look at the figures below: the CBOE S&P Put Write Index
(PUT Index) had a slightly higher annualized return for a much smaller max drawdown (-
In Today’s Note: 32.7% vs -50.9%) and lower volatility (10.2% vs 15.3%). The PUT Index measures the P&L of
selling monthly at-the-money puts, fully collateralized (you will never be on the hook to buy
The Joy of Put Selling
more dollar notional of SPX than you have in cash).
Gold downside
S&P buy and hold vs. monthly put selling since July 1986
Trade Update Metric S&P Total Return PUT Index
Unusual Options volume Annualized Return 10.0% 10.2%
Maximum Drawdown -50.9% -32.7%
Option Flows
Max DD / Ann Ret 5.1 3.2
Sharpe Ratio 0.47 0.67
Sortino Ratio 0.71 0.91
Annualized Volatility 15.3% 10.2%
Best 1M 13.5% 9.0%
Worst 1M -21.5% -17.7%
Best 12M 53.6% 41.1%
Worst 12M -43.3% -29.1%
Source: Macro Risk Advisors, Bloomberg, CBOE

Strictly Confidential. Pravit Chintawongvanich

1 Do Not Duplicate or Distribute. MRAD<GO> Contact: 212-287-2640
Head Derivatives Strategist
 November 10, 2015
Daily Strategy Note
Why does put selling work so well? Because we get to sell rich premium when the market is selling off, and this extra
premium compensates us for underperforming during the rallies. Imagine if the S&P never had drawdowns – then of
course selling puts would underperform. Counter-intuitively, selling puts outperforms buy-and-hold because of
drawdowns. Of course, there’s no guarantee this outperformance will last forever – a huge drawdown happening
in one month or a prolonged, fast rally could cause buy and hold to outperform. Still, it’s a simple way to show how
collecting volatility premium can enhance returns and reduce risk. This is the thinking behind most of our “sell put in
lieu of stock” ideas: that sometimes it is worth sacrificing the upside to collect the vol premium.

S&P Total Return vs. Put Selling, 1986-2015 (Log Scale)

1,600
SPX PUT

800

400

200

100

Source: Macro Risk Advisors, Bloomberg

50
Jul-86 Jul-89 Jul-92 Jul-95 Jul-98 Jul-01 Jul-04 Jul-07 Jul-10 Jul-13

Strictly Confidential. Pravit Chintawongvanich

2 Do Not Duplicate or Distribute. MRAD<GO> Contact: 212-287-2640
Head Derivatives Strategist
 November 10, 2015
Daily Strategy Note
2. Gold downside Price of GLD 1m 95/90 put spreads as % spot
Gold has been flirting with new lows since the jobs 1.2%
Source: Macro Risk Advisors, Bloomberg
report, selling off along with treasuries. Yielding
nothing, it makes sense that it should sell off as rates 1.0%
increase. We also pointed out in our yesterday note
that gold futures long positions have been trimmed
down in the past few weeks. We have also seen 0.8%

skew rise in the near-dated options, yet absolute vol

levels are fairly low – making the initial price of put 0.6%
spreads low relative to history.
0.4%
To play further downside in gold, look at the GLD
Dec 102/96 put spread for 95c (ref 104.40). Initially
short 23 delta, the max value at expiry ($6) is ~6x the 0.2%
initial premium.
0.0%
Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15

6.00
Source: Macro Risk Advisors, Bloomberg
5.00

4.00

3.00

2.00

1.00

0.00
90 91 92 93 94 95 96 97 98 99 100 101 102 103 104 105 106 107
-1.00

-2.00
Mark P&L as of 11/10/15 Mark P&L as of 11/24/15 Mark P&L as of 12/08/15 Intrinsic

Strictly Confidential. Pravit Chintawongvanich

3 Do Not Duplicate or Distribute. MRAD<GO> Contact: 212-287-2640
Head Derivatives Strategist
 November 10, 2015
Daily Strategy Note

Trade Update
Note Initial Current Exit Exit Current
Trade Rationale
Date Mark Mark Mark Date P&L Delta

TLT Jan 123 call

11/9/15 0.99 0.79 -0.20 22% Own cheap TLT upside
Vol collapse after Dec
VXX Dec/Jan 16 put calendar
11/6/15 0.42 0.39 -0.03 -6% Fed into holidays

VIX Dec 17/16/15 Put Tree

10/29/15 -0.10 0.07 0.18 12% Dec Fed will keep VIX bid
VIX Nov 19/20 strangle vs 23 Play for continued
call 10/7/15 -2.50 -3.60 11/6/15 -1.10 volatility, sell VIX premium
VIX Oct 21/24 straddle vs.
call 9/11/15 -3.10 -4.95 10/21/15 -1.85 Sell high vol-of-vol
Eventual normalization of
VIX Dec/Feb 25 Put Calendar
9/9/15 0.00 0.37 10/12/15 0.37 VIX curve
SPY Oct 210/Dec 31st 215 Eventual rally; near-term
Call Calendar 9/2/15 0.62 1.18 10/30/15 0.56 upside capped
VIX Sep 20/ Oct 19 put
calendar 8/24/15 -0.05 -0.85 9/1/15 -0.80 Vol inversion overdone
Sell SPY Sep11th
213/210/207 iron fly 8/12/15 -2.35 -3.00 9/11/15 -0.65 Play for rangebound mkt
Long AAPL Dec 110/100 1x2
ps 8/6/15 0.30 0.22 -0.08 -5% AAPL skew and vol high

Long Sep4th 207/200 1x2ps

8/5/15 0.62 0.95 8/20/15 0.33 Play for limited downside
Long 1x XLE Dec 63 put, 0.5x XLE vol low; play for
Dec 75 call 7/27/15 2.55 6.60 8/25/15 4.05 further downside
Play for limited downside /
SPY Aug 213/210/207 put fly
7/22/15 0.45 0.90 8/11/15 0.45 rangebound mkt
Buy the SPY Aug 208/200
1x2 put spread 7/15/15 0.50 0.98 8/4/15 0.48 Play for limited downside

VIX Sep 16/15/14 put tree

7/15/15 0.10 0.00 9/16/15 -0.10 Sep VIX floored around 13
Buy cheap gold vol near
Buy GLD Oct 111 straddle
7/14/15 6.45 8.55 7/22/15 2.10 1150 level
Play for a break through
Buy GLD Oct 100 puts
7/14/15 0.62 0.90 8/11/15 0.28 1150
Note: This is a hypothetical portfolio for illustrative purposes only. MRA is an agency brokerage and does not take
proprietary risk.

Strictly Confidential. Pravit Chintawongvanich

4 Do Not Duplicate or Distribute. MRAD<GO> Contact: 212-287-2640
Head Derivatives Strategist
 November 10, 2015
Daily Strategy Note

Unusual Options Volume

Options Average Underlying
Upcoming Put/Call 1M ATM IV 3M ATM IV
Ticker Company Industry Volume on Daily Options Price %
Earnings Date Ratio Change Change
Day Volume Change
TYC Electronic Secur Devices 11/13/2015 12,400 257 0.02 (0.7) 6.1 3.3
RAX Computer Software 11/9/2015 12,798 626 1.19 (4.2) 3.4 1.7
FTK Oil Field Mach&Equip 1/26/2016 5,984 560 3.74 (19.3) 44.2 22.7
MW Retail-Apparel/Shoe 12/9/2015 21,344 2,058 0.08 (3.1) 1.6 (5.5)
Top
CAA Bldg-Residential/Commer 2/4/2016 5,809 585 0.26 (0.8) (0.7) 5.0
Calls
ADXS Medical-Biomedical/Gene 1/5/2016 7,082 741 0 6.0 1.6 (1.6)
NRF REITS-Diversified 11/9/2015 5,693 664 0.11 (10.2) (4.9) 0.8
NSC Transport-Rail 1/27/2016 6,586 885 0.35 11.0 12.9 12.5
W E-Commerce/Products 11/10/2015 7,651 1,220 0.94 3.9 17.4 1.1
IRWD Medical-Drugs 2/11/2016 6,013 3 222.7 (1.1) (10.6) (6.3)
ARMK Commercial Services 11/18/2015 5,389 26 31.7 (0.6) 0.3 0.4
PENN Racetracks 11/13/2015 5,557 314 3.15 (2.6) 3.0 2.1
OIS Oil-Field Services 2/17/2016 7,909 461 125.54 (2.8) 6.5 3.5
Top
NSAM Invest Mgmnt/Advis Serv 11/9/2015 20,951 1,268 44.11 (7.9) (4.8) (4.3)
Puts
ODP Retail-Office Supplies 2/23/2016 55,104 3,698 331.95 (3.0) 6.7 2.5
RAX Computer Software 11/9/2015 15,199 1,024 1.19 (4.2) 3.4 1.7
GLUU Entertainment Software 2/3/2016 5,495 391 1.47 (3.0) 1.9 (1.6)
MNK Medical-Drugs 11/23/2015 16,918 1,295 4.83 (17.0) 30.0 19.3

Flows
Index Options Flow Single Stock Options Flow
IYR Nov13th 71/72.5 1x3 put spread (selling the single leg) trades ACAS Dec 15 Call bought for 0.17, 10,000x. (Ref 14.07)
for a 0.01 credit, 5,500x by 16,500x opening (Ref 72.62)
ODP Apr 6 Put bought for 0.65, 50,000x closing. (Ref 7.69)
VIX Nov18th 20 Call trades 0.30, 20,000x. (Ref 15.90)
MCD Jun 110 Call bought for 7.35, 8,905x. (Ref 112.75)
FXI Dec 43 Put bought for 5.11, 13,000x. (Ref 38.10)
X Apr 9 Put bought for 1.77, 9,724x. (Ref 10.51)
SLV Jan 16 Call sold at 1.63, 10,400x. (Ref 13.89)

This document has been prepared by Macro Risk Advisors’ (“MRA”) Sales and Trading Group for informational purposes only. MRA does not publish research reports as defined under FINRA Rule 2711. MRA does not trade
proprietarily, and is not acting as an advisor or fiduciary. MRA does not guarantee the accuracy or completeness of information which is contained in this document and accepts no liability for any consequential losses
arising from the use of this information. Any data on past performance, modeling or back-testing contained herein is no indication as to future performance. All opinions and estimates are given as of the date hereof and
are subject to change. The options risk disclosure document can be accessed at the following web address: http://optionsclearing.com/publications/risks/riskchap1.jsp Please ensure that you have read and understood it
before entering into any options transactions.

Strictly Confidential. Pravit Chintawongvanich

5 Do Not Duplicate or Distribute. MRAD<GO> Contact: 212-287-2640
Head Derivatives Strategist