EFTA Document EFTA01435199

Subject: [ / ] Vols & Strikes - DB's Equity Derivatives Weekly From: Nadean Novogratz Date: Sun, 28 Oct 2018 17:54:46 -0400 To: Paul Barrett ‹ > Cc: Karthik Nagalingam Martin Zeman IMINIONIIIIMENIMFMNIIIM Stewart Oldfield Alan Brody <[email protected]> Hi Paul, I hope you've had a nice weekend. Please see below our weekly derivatives commentary and trade ideas. Please let us know if you have any questions. Thank you, Nadean From: Karthik Nagalingam [mailto:[email protected]] Sent: Sunday, October 28, 2018 4:37 PM To: Karthik Nagalingam Subject: [ / ] Vols & Strikes - DB's Equity Derivatives Weekly {cid:[email protected]} {cid:[email protected]} VOLS & STRIKES — DB's Equity Derivatives Weekly Best Ideas of the Week For Institutional Clients Only — Not for Retail Distribution. Market Commentary — Not a Product of Research. EFTA01435199 Table of Contents: I. vFLARE — Risk Parity starting to sell, can accelerate if vol remains high II. to fall History doesn't repeat, it rhymes — SPX may have further III. Week Ahead Earnings Calendar I. vFLARE — Vol control and CTA strategies have de-risked, risk parity funds have started selling vFLARE (Volatility, Feedback Loops, And Risks to Equities): Coming into October Systematic strategies were highly allocated to equities, only Risk Parity funds remain highly allocated The SPX is down over 10% since the start of October, and realized vol on the SPX has steadily increased since the initial spike on Oct-9. These funds rarely sell at the same time, but cascade as different triggers are hit. Vol control had it's moving party first, then CTAs slowly reduced SPX exposure, and are currently near the levels they would flip to a seller. Risk parity funds are seeing their portfolio vol trade higher, we are increasingly getting to levels they have reduced equity exposure in the past. Risk parity funds starting to sell and have definitely felt the pain in the current environment, and by measuring their theoretical portfolio vol they have entered the range they have sold equities exposure in the past (4.5-5% portfolio vol). Risk parity are the last systematic strategy to sell, and we just started seeing selling late this week following the large back and forth swings Wed-Fri. Risk Parity funds likely had —50-70 bln to sell in aggregate, and likely have started selling —10 bln this week. The risk to markets here is a large increase in their portfolio vol — still driven by vol increasing not correlation signs switching around. Source: Deutsche Bank, Bloomberg Finance L.P, EFTA01435200 Vol control: Majority of selling done, even considerable volatility from here will only create marginal selling. This week saw roughly an additional —5-10bln over the week. While the threat of a large spike of selling is over, the longer realized vol remains high the longer it takes them to become an buyer of equities. Source: Deutsche Bank, Bloomberg Finance L.P, SEC Regulatory Filings CTAs: CTAs have likely already sold down the majority of SPX exposure, there seems to be a slight uptick midweek due to the oversold conditions. However, the increasing realized vol and plateauing/downward-trending moving averages are going to mean that CTA sell signals will stay on. There is currently less instantaneous sell risk from CTAs, but increasing risk of funds going net short. The funds haven't been net short since the market routs in 2015 and early 2016, but they are approaching that switch point. Source: Deutsche Bank, Bloomberg Finance L.P II. History Doesn't Repeat, It Rhymes — SPX May Have Further to Fall SPX Down 3% and then a 1.5% "Relief Rally" — What has happened before? Recent high market volatility has caused us to look back and see what current price action has preceded in the past... and it's not a pretty picture, but the path from there diverges. Buy protection in the short term if you have not de-risked, and if you are taking a shot at upside look further out the curve. Looking at instance of the market down 3% and then rallying 1.5% - the average intraday drawdown over the next 5 days was -7.4% (median: 7.9%) , with a close to close average mark down 4% on average. The instances are clustered as expected in other high vol periods; Feb 2018, Summer 2011, 2008/09, 02-03, 97, etc. It is not only that you average a drawdown, it's the fact that there are no positive observations since the 50s. Where we go from there becomes less certain, as the market both rallied and sold off even further in different instance, and in many instance in massive ways. If you have not de-risked, consider adding protection and if you have, EFTA01435201 looking past this, there may be opportunities further out the curve. III. Week Ahead Earnings Calendar SPY and NDX stock reporting this week — w/ ADV of options > 500 Source: Bloomberg, Deutsche Bank Thank you, DB Derivs Team https://ederivatives.db.com/static/disclaimer.html This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Please refer to https://db.com/disclosures for additional EU corporate and regulatory disclosures. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01435202 This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Please refer to https://db.com/disclosures for additional EU corporate and regulatory disclosures. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Please refer to https://db.com/disclosures for additional EU corporate and regulatory disclosures. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01435203