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Deutsche Bank Equities AAPL Trade Idea November 2014 Pc ft, pe,e0m, For U.S. Key Client Partners ("KCP") Clients Only ' • • roup Institutional Use Only — Not for Retail Distribution EFTA01116955 AAPL's daily stock return has exhibited statistically significant correlation to the day of the week since 2011 Monday's outperformance is greater and more statistically significant than Friday's underperformance Deutsche Bank Equities Apple stock price performance Average stock price performance by day of week 0.7% 2008 to 2010 0.5% 0.3% 0.1% (0.1%) (0.3%) 0.7% 0.5% - 0.3% - 0.1% - • APPle • S&P 500 0.25% 0.20% I ° ° 6 - A L., 0.16% 0.11% (0.00%) Monday Tuesday 0.58% (0.04%) Wednesday Thursday 2011 to Present 0.30% (0.1%) - (0.05%) (0.3%) 19% (0.17%) 0.06%) Friday • Apple • S&P 500 0.07% (0.02%) (0.01%) (0.13%) (0.16%) 0.10% Monday Tuesday Wednesday Thursday Friday I Statistical significance over time — To test for statistical significance, we ran yearly regressions of AAPL's daily stock returns versus whether the day was a Friday or Monday — We calculated the p-value for the day variable — The p-value is a measure of the probability that the return is not correlated with the variable — For example, a p-value of 0.01 means there's only a 1% chance that the return is not correlated with the variable — A lower p-value means more statistical significance — Monday's p-values declined since 2008 and the variable showed very strong statistical significance since 2011 — Friday's p-values also declined, but to a lesser extent and have increased again in 2013 and 2014 0.80 0.70 0.60 0.50 0. 0.40 0.30 0.20 0.10 0.00 Weekly options in o AAPL (June 2010) Zrr 0 O O C•I 0 0 O e tp-sb r6) et q. . Fticlay —a—Monday ti Source: Bloomberg (for stock prices. dividend history, and index prices). as of November 3. 2014 "it O gr; 2 EFTA01116956 Trading this pattern would have resulted in significant gains with limited downside risk This analysis looks at trading AAPL stock and an equivalent value of the S&P 500 beginning in 2008 Going long AAPL / short S&P 500 only on Mondays produces the largest gain — over 2x a long/short strategy held over all days and over 3x a short AAPUlong S&P 500 strategy on Fridays Combining the two strategies (Monday and Friday) results in even greater returns Deutsche Bank Equities Apple stock price performance (continued) Value of Monday's outperformance vs S&P 500 900 800 700 600 - 500 400 300 200 100 0 Oe' Weekly options in AAPL list (June 2010) C; C; Gt. PO, ci.") 004 O46 ° es Oes Combined Friday / Monday performance vs S&P 500 900 800 700 600 500 Weeky options in 400 AAPL 1;st 300 (June 2010) 200 100 0 ! CS\ @ 0 ,\I\ <k 0 c./ Oec O121 Oe' C. ce oeci OeG Value of Friday's underperformance vs S&P 500 I 900 800 - 700 - 600 - 500 - Weekly options en 400 - AAPL lest (June 2010) 300 - 200 - A A A 41, 100 -0 •"•••sarsa 0 A t , c; ; it; eaci ge ge ge Q& Long AAPL and short S&P 500 900 - 800 - 700 - 600 - 500 - 400 - Weeky options it AAPL Sst 300 - (June 20': 200 - 100 0 6;:, 0 NA ".. Oes° OeCi 0 04 0 6: O ci e' 004 This analysis locks at trading equal amounts of AAPL and S&P 500 from January 2.2008 till November 3. 2014. The returns of each strategy are compounded (ie. returns are reinvested back into the strategy) and both stock and index returns are calculated on a total return basis (ie. assuming dividends are reinvested). Assumes no friction costs. 3 EFTA01116957 Weekly options in AAPL stock began to be listed in June 2010 This coincides roughly with the development of the Friday / Monday trading pattem Overview of Weekly options History Listing Purpose Trading • The CBOE launched Weekly options in October 2005. These were originally only on the S&P500 • The CBOE expanded the product in June 2010 to include more underlyings • Since June 2010, Weekly options are listed before the open on Thursdays • Currently, the AAPL Weeklys are part of the "expanded" program and have 6 expirations. A new expiration is added every week • When the CBOE introduced Weeklys, it stated that they would provide an "efficient way to trade options specifically around certain news or events - such as economic data or earnings announcements" • Trading options instead of stock is a convenient way to lever positions around events • Unlike the broader market, trading in AAPL options is much more skewed towards calls than puts • We have found little evidence of institutional trading in these options • This means the majority of trading is done by: —High frequency traders —Retail investors Deutsche Bank Equities 4 EFTA01116958 The CBOE has data on each option trade and designates the buyer and seller of options as either "customer" or -firm". We attribute "customer" transactions to directional retail investors, and "firm" transactions to hedged market participants The dataset has certain limitations: - The CBOE is only one of several exchanges that list options (with -20% of total volume) - Market maker trades are excluded - The data does not have time stamps (which would have allowed us to see whether trading is clustered during a certain part of the day and compare this to the stock's intraday behavior) Deutsche Bank Equities Analysis of OBOE AAPL option trading data(a) Summary activity of directional market participants (i.e., retail investors) - Since the Monday / Friday phenomenon coincides with the listing of weekly options, we focused on options with the shortest expiry — Consistent with a hypothesis that Monday's outperformance is due, at least in part, to retail investors initiating option positions, the vast majority of directional option trades on Mondays were opening transactions — In addition, the majority of the positions that were opened were bullish transactions, which would have caused a hedged market participant to buy shares — By Friday, the majority of option trades were closing transactions - Since the majority of option trades were bullish positions, closing these positions would have caused a hedged market participant to sell shares (a) Source: www.marketelataexpress.com. (b) From July 2010 to February 2014. Based on options with the shortest expiry. Opening versus closing transactions for directional market participantsm 70% 65% 60% it 55% 2 50% 45% 40°A. ° 35% 30% 25% 201/ Monday Tuesday Wednesday Thursday Friday % of option trades that opened positions - — %of option trades that closed positions Bullish opens versus bearish opens for directional market participantsm 50% 40% it it 30% a 20% 10% 0°/ L Friday Monday Tuesday Wednesday Thursday ■ Bullish opens (buy calls / sell puts) • Bearish opens (sell calls / buy puts) 5 EFTA01116959 DB analyzed every AAPL listed option trade that occurred from January 2013 to February 2014 These trades were classified as bullish or bearish depending on whether they traded at the bid or the offer. So, for example, a call that traded on the offer side was deemed a bullish trade. We ignored transactions that traded at mid market We then delta-weight this activity to capture a directional view of the overall options market Net "delta" in AAPL listed option market — Option traders will hedge their positions by trading in the underlying stock to maintain a "delta" neutral position to stock price performance (i.e., sell calls and buy stock such that they are indifferent to changes in the stock price) — Looking at the net deltas of actual option activity shows that Fridays are more likely to see selling activity, while Mondays are more likely to see buying activity ANerage net delta On shares) % of days negative % of days positive Friday (99.292) 63.8% 36.2% Monday 131.618 39.7% 60.3% Other (373.363) 56.0% 44.0% — Even though the amount of stock is small relative to Apple's ADTV of 10 - 15mm shares, there is a strong correlation between this activity and the stock return on the relevant day of the week(a) Fridays — return vs net delta Net delta (sold) bought 0 Deutsche Bank Equities R2 = 0.7548 500 1.000 Mondays — return vs net delta Net data (sold) bought tc Co Other days — return vs net delta(b) 5% 4% 3% 2% 1% 0% (1%) • • • • **6 • • • • (23t) (3%) (4%) (1,000) (500) • O 500 1.000 Net della (sold) bought Source: tradealartcom (a) Based on January 1, 2013 to February 14. 2014 (b) The dataset includes some outliers (e.g.. earnings releases) that depress the R2. Excluding datapoints that have more than lmm shares of net delta or absolute value of the return of greater than 5% results in a 0.57 R2 6 EFTA01116960 60-day moving average volume in options (in 000s) Trading in AAPL options 1200 (calls and puts) has doubled from 2010 to June 2014 The underlying shares that these options represent are larger than the stock volume — delta adjusted, though, the volume would be about 25-50% based on recent data 1000 Apple's open interest as a percent of its outstanding stock is higher than any other S&P 100 company and its ratio of calls to puts is higher than the broader market as well as the average S&P 100 company Deutsche Bank Equities 800 600 400 200 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Apple Ratio of calls to puts Jan-14 AAPL option volume analysis(a) Weekbe option:, AAPL Asf (June 2010) S8P500 s 400% a a 300% I 60-day moving average of Apple stock and option volume (based on underlying shares) 600% 500% a ° 200% 1.80x 1.60x 1.40x 1.20x 1.00x 0.80x 0.60x 0.40x 0.20x 0.00x 1.18x 1.66x 1.43x 1 1.20x .28x 0.69x 0.59x 1.34x 0 61 0.60 0.58x i 1.47x 0.61x I 0.56x 2008 2009 2010 2011 2012 2013 2014 •AAPL •S&P500 YTD 100% 0% Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 -- Shares underlying options — AAPL stock volume Top 10 S&P 100 companies by option open interest(b) 11.fueic(/ upt,: ns AAPL kst (June 20:0 60 50 40 0 Rack OEXlndex 1 AAPL 1hV Equty Awe it 5479 27.4% 2 FB UW Equily Fxebxk Inc $173 16.0% 3 GOOG OW Equty Gorge Inc 5404 13.1% 4 GAI UN Equhy General lAotom Co $57 11.9% 5 CAT UN &iry Caterpillar he $61 11.5% 6 APC UN Equty Anadarko Petroleum Cap 342 10.3% 7 AIAZN LW Equity Amazon.ccm he $160 9.2% 8 FCX UN Equity FreeportAlcMoRan Copper 8 Gdd he $34 8.7% 9 HAL UN Ecady Hanlon Co 346 7.9% 10 EBAY UW Eel* °Bay Inc $71 7.6% Menge - to 10 12.4% Menge all 100 3.7% Company MaMei cap Oman open [merest as % Ra:o ol calls ol shares to pits Source: Bloomberg. (a) As of June 6. 2014 (b) Noe averaged over any time palled 1.49x 1.61x Lott Lou 216x 0.99x 1.01x 1.28x 1.81x 1.37x 1.32a 7 EFTA01116961 Summary / — Apple's stock price does exhibit an abnormal trading pattern on Monday and Friday — Monday's outperformance is more significant, and more consistent, than Friday's underperformance — The pattern developed around 2011 coinciding with the listing of Weekly options on AAPL stock — AAPL option trading is more significant than the option trading for other large companies — Weekly options increased the amount of AAPL option trading volume — The net "delta" of the options market (limited to what we classify as directional transactions), while small relative to total liquidity, does correlate to the stock price performance — Given all the above, along with the ratio of calls to puts, and the significant retail element to the listed option market, we suspect the abnormal trading pattern could be explained by the following activity: — Investors selling puts and strangles (a combination of out-of-the-money puts and calls) to generate income — Investors buying calls as a levered long equity investment — Assuming this is the case, hedged market participants will be short calls on a net basis. Such participants will need to purchase stock to hedge their stock price risk — This may result in hedged investors purchasing stock on Mondays as positions are initiated, while selling stock as their delta erodes on Fridays — The change in open interest supports this as the open interest increases the most on Mondays and decreases the most on Fridays Deutsche Bank Equities a EFTA01116962 DB proposes a strategy referencing the combined return of the Friday and Monday trades with gains or losses reinvested in the strategy on a daily basis (alternatively, a strategy on Monday-only could also be implemented) Strategy will use SPY, the SPDR S&P 500 ETF, to replicate the S&P 500 total return Strategy assumes dividends are reinvested on the ex-date Strategy incorporates a transaction cost of 0.002% per execution on notional amount executed Deutsche Bank Equities Strategy Implementation Monday outperformance vs SPY 800 - 700 600 500 400 300 200 100 0 mA O Ann_ agium Volatility Sharpe Batto 138 to '10 11.5% 14.2% 0.81 '11 to Present 30.6% 11.5% 2.67 0z) o° O°Q- O° o° o° Combined Friday / Monday performance vs SPY 800 700 - 600 - 500 - 400 - 300 200 - 100 0 5§ eP Ann. Return Volatility ShaiReitali0 408 to 1 0 12.8% 19.9% 0.64 '11 to Present 48.2% 12.5% 3.86 4:$ 4' O.c. e ct Oect I Friday underperformance vs SPY 800 700 Ann. Return Volatility Shame Ratio 600 '08 to '10 1.2% '11 to Present 13.4% 14.6% 8.4% 0.08 1.59 500 400 300 200 100 0 O O% O cf cf O" O° O" Annual Returns ' O° O°Cr O° O° 80% 70% - 60% - 50% - 40% - 30% - 10 - LI % 20% % 0 - a - -20% 2008 2009 • Monday • Friday • Combined 2014 2010 2011 2012 2013 YTD Monday Friday Combined -7.6% 16.8% 8.0% 27.3% -9.5% 15.2% 18.0% -1.7% 15.9% 33.1% 2.5% 36.5% 47.0% 19.5% 75.7% 23.5% 27.4% 57.4% 32.8% -0.1% 32.7% This Strategy assumes trading an equal dollar amount long and short (or short and long) of AAPL and SPY on each execution day and reinvesting the gains or tosses in the strategy. Source: Deutsche Bank. Bloomberg Finance L.P.. as of November 3. 2014 9 EFTA01116963 Disclaimer I Deutsche Bank (which includes Deutsche Bank AG, its branches and all affiliated companies) is not acting as your or any of your agents' (collectively, "You" or "Your") financial adviser, consultant or fiduciary with respect to any information provided in the materials attached hereto. Deutsche Bank does not provide investment, legal, tax or accounting advice and does not express any opinion or recommendation whatsoever as to any strategies, products or any other information presented in the materials. Information contained herein is being provided solely on the basis that it has not and will not form a primary basis for any investment decision, and does not constitute a recommendation, or express an opinion on, any product or service or any trading strategy. 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Unlike an actual performance record based on trading actual client portfolios. sinulated results are achieved by means of the retroactive application of a back tested model itself designed with the benefit of hindsight. Taking into account historical events the back testing of performance also differs from actual account performance because an actual investment strategy may be adjusted any time. for any reason, including a response to material, economic or market factors. The back tested performance includes hypothetical results that do not reflect the reinvestment of dividends and other earnings or the deduction of advisory fees, brokerage or other commissions, and any other expenses that a client would have paid or actually paid. No representation is made that any trading strategy or account will or is likely to achieve profits or losses similar to those shown. 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