EFTA Document EFTA01410511

Deutsche Bank Equities AAPL Trade Idea November 2014 Equities Structuring Group (212) 250-6054 Institutional Use Only — Not for Retail Distribution EFTA01410511 Apple stock price performance 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 Average stock price performance by day of week 2008 to 2010 0.1% 0.3% 0.5% 0.7% (0.3%) (0.1%) (0.3%) (0.1%) 0.1% 0.3% 0.5% 0.7% Deutsche Bank Equities Apple S&P 500 0.25% 0.20% 0.16% 0.11% 0.06% (0.00%) (0.06%) (0.04%) Monday 0.58% Apple S&P 500 0.30% 0.19% 0.07% (0.05%) Monday (0.02%) (0.01%) (0.13%) (0.16%) Tuesday Wednesday Thursday Friday EFTA01410512 Friday Source: Bloomberg (for stock prices, dividend history, and index prices), as of November 3, 2014 Monday 2 0.10% Tuesday Wednesday Thursday 2011 to Present 0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 (0.17%) Friday — Friday's p-values also declined, but to a lesser extent and have increased again in 2013 and 2014 Weekly options in AAPL list (June 2010) 0.02% 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 p-values 0.310 0.354 0.144 0.003 0.028 0.000 0.091 0.003 0.001 0.514 0.291 0.477 0.641 EFTA01410513 0.710 EFTA01410514 Apple stock price performance (continued) Value of Monday's outperformance vs S&P 500 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 AAPL/long S&P 500 strategy on Fridays Combining the two strategies (Monday and Friday) results in even greater returns 100 200 300 400 500 600 700 800 900 0 Value of Friday's underperformance vs S&P 500 Weekly options in AAPL list (June 2010) 100 200 300 400 500 600 700 800 900 0 Weekly options in AAPL list (June 2010) Combined Friday / Monday performance vs S&P 500 EFTA01410515 100 200 300 400 500 600 700 800 900 0 Long AAPL and short S&P 500 Weekly options in AAPL list (June 2010) 100 200 300 400 500 600 700 800 900 0 Weekly options in AAPL list (June 2010) Deutsche Bank Equities This analysis looks 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 EFTA01410516 Overview of Weekly options Weekly options in AAPL stock began to be listed in June 2010 This coincides roughly with the development of the Friday / Monday trading pattern History Listing • 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" Purpose • 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 Trading • We have found little evidence of institutional trading in these options • This means the majority of trading is done by: dAlHigh frequency traders 5411Retail investors Deutsche Bank Equities 4 EFTA01410517 Analysis of CBOE AAPL option trading data(a) Summary activity of directional market participants (i.e., retail investors) 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 — 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 Opening versus closing transactions for directional market participants(b) EFTA01410518 20% 25% 30% 35% 40% 45% 50% 55% 60% 65% 70% Monday Tuesday Wednesday Thursday % of option trades that opened positions % of option trades that closed positions Bullish opens versus bearish opens for directional market participants(b) 10% 20% 30% 40% 50% 0% Monday (a) Source: www.marketdataexpress.com. (b) From July 2010 to February 2014. Based on options with the shortest expiry. Tuesday Wednesday Thursday Bullish opens (buy calls / sell puts) Friday Bearish opens (sell calls / buy puts) 5 Friday % of options traded % of options traded EFTA01410519 Net "delta" in AAPL listed option market 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 — 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 Average net delta (in shares) Friday Monday Other (99,292) 131,618 (373,363) % of days negative % of days positive 63.8% 39.7% 56.0% 36.2% 60.3% 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 (4%) (3%) (2%) (1%) EFTA01410520 0% 1% 2% 3% 4% 5% (1,000) (500) 0 Mondays — return vs net delta R2 = 0.7548 (4%) (3%) (2%) (1%) 0% 1% 2% 3% 4% 5% 500 Net delta (sold) bought Deutsche Bank Equities Source: trade-alert.com (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 1mm shares of net delta or absolute value of the return of greater than 5% results in a 0.57 R2 1,000 (1,000) (500) 0 500 Net delta (sold) bought Other days — return vs net delta(b) R2 = 0.6285 (4%) (3%) (2%) (1%) 0% 1% 2% 3% 4% 5% 1,000 EFTA01410521 (1,000) (500) 0 500 Net delta (sold) bought 6 R, = 0.2218 1,000 Stock Return Stock Return Stock Return EFTA01410522 AAPL option volume analysis(a) 60-day moving average volume in options (in 000s) Trading in AAPL options (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 200 400 600 800 1000 1200 0 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 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 S&P500 Apple Ratio of calls to puts 0.00x 0.20x 0.40x 0.60x 0.80x 1.00x 1.20x 1.40x 1.60x 1.80x Deutsche Bank Equities 1.66x 1.43x 1.18x 1.20x 1.28x EFTA01410523 1.34x 1.47x Rank OEX Index 1 AAPL UW Equity Apple Inc 2 FB UW Equity 0.69x 0.59x 0.61x 0.60x 0.58x 0.61x 0.56x Facebook Inc 3 GOOG UW Equity Google Inc 4 GM UN Equity 5 CAT UN Equity 6 APC UN Equity General Motors Co Caterpillar Inc Anadarko Petroleum Corp 7 AMZN UW Equity Amazon.com Inc 8 FCX UN Equity 9 HAL UN Equity 10 EBAY UW Equity eBay Inc 2008 2009 2010 2011 2012 2013 2014 YTD AAPL S&P500 Source: Bloomberg. (a) As of June 6, 2014 (b) Not averaged over any time period 7 Average -- top 10 Average -- all 100 Freeport-McMoRan Copper & Gold Inc Halliburton Co Company Weekly options in AAPL list (June 2010) 60-day moving average of Apple stock and option volume (based on underlying shares) 100% 200% 300% 400% 500% 600% 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) EFTA01410524 Option open Market cap ($bn) $479 $173 $404 $57 $61 $42 $160 $34 $46 $71 interest as % of shares 27.4% 16.0% 13.1% 11.9% 11.5% 10.3% 9.2% 8.7% 7.9% 7.6% 12.4% 3.7% Ratio of calls to puts 1.49x 1.61x 1.08x 1.22x 1.00x 2.16x 0.99x 1.01x 1.28x 1.81x 1.37x 1.33x Weekly options in AAPL list (June 2010) 10 20 30 40 50 60 0 EFTA01410525 AAPL stock volume (in mm) Shares underying option volume as % of AAPL stock volume EFTA01410526 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 8 EFTA01410527 Strategy Implementation Monday outperformance vs SPY 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 100 200 300 400 500 600 700 800 0 '08 to '10 11.5% '11 to Present 30.6% Ann. Return Volatility Sharpe Ratio 14.2% 11.5% 0.81 2.67 Friday underperformance vs SPY 100 200 300 400 500 600 700 800 0 '08 to '10 Ann. Return Volatility Sharpe Ratio 1.2% EFTA01410528 '11 to Present 13.4% 14.6% 8.4% 0.08 1.59 Combined Friday / Monday performance vs SPY Ann. Return Volatility Sharpe Ratio Annual Returns 100 200 300 400 500 600 700 800 0 '08 to '10 12.8% '11 to Present 48.2% 19.9% 12.5% 0.64 3.86 -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Monday Friday Deutsche Bank Equities Monday Friday Combined 2008 2009 2010 2011 2012 2013 2014 YTD -7.6% 27.3% 18.0% 33.1% 47.0% 23.5% 32.8% 16.8% -9.5% -1.7% 2.5% 19.5% 27.4% -0.1% Combined 8.0% 15.2% 15.9% 36.5% 75.7% 57.4% 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 losses in the strategy. Source: Deutsche Bank, Bloomberg Finance L.P., as of EFTA01410529 November 3, 2014 9 EFTA01410530 Disclaimer 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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