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Goldman Derivative Desk Trading Summary

Tyler Durden's picture




 

Krag Gregory's derivative trading desk has had its share of success over the past several years which is why we present the latest compilation packet by the Goldman Derivative traders. While it is not surprising that this particular silo of Goldman is alligned with the prevalent theme at GS, which is S&P500 at 1,500 or bust, which obviously would imply ongoing declines in vol (with or without the assistance of the Fed), there are some obseravtions that deserve to be highlighted...

First, here are the top trading themes in the current edition:

#1 Tablets drive change in the PC landscape: Buy calls on likely winners as investors evaluate 10 tablet launches in 2011; sell calls on traditional PC exposed names.

#2 Consumer buy-writes are attractive: Our analysis shows consumer stocks tend to rise but lag the broad market at this phase in the cycle.

#3 Energy calls are inexpensive relative to upside volatility potential; we identify the top nine call buying opportunities based on price targets, earnings growth, and multiple expansion potential.

#4 M&A: We identify options trades on 7 stocks to benefit from potential deal announcements

This is great, although we will pass. Instead we focus on two neutral themes which actually are based on facts, not opinions. First, from "Cross-asset indicators for equity portfolio managers"

We track the movements in S&P 500 equity, implied volatility, and CDS spreads to identify market divergences. We investigate these divergences with the goal of deciding which market has an information edge that could cause the other asset classes to follow. We use several statistical methods to understand the short-term and long-term divergences between these three asset classes, including analyzing returns over short periods, log levels over long periods of time, and techniques which integrate both short- and long-term components such as Vector Error Correction models (VECM). Our current observations:

(1) Derivatives markets suggest moderate risk for equity. Over the past month, the relationship between credit, equity and volatility has been stable. The 5% rise in the S&P 500 has been accompanied by a 3%  decline in 5 year CDS spreads (bullish), and a 19% decline in 6 month implied volatility (bullish). Based on the relationship between these metrics over the past eight years, equity appears to have traded in-line with the derivatives markets since 17-March. Based on divergences earlier in the year, S&P 500 equity appears to be modestly above where these metrics would suggest.

(2) Financials equity has underperformed moves in CDS and options over the past month. CDS spreads of financials in the XLF have tightened by 4% in the past month and options implied volatility has declined by 14%. The sharp decline in financials implied volatility benefited last month’s top theme #4, where we advocated selling Financials volatility. Based on past relationships, we would have expected XLF equity to rise 10%, but it declined 1%. These moves resulted in the “upside to Financials” moving from +12% to +23% over the period. Many investors have argued that the increased capital requirements and regulation should cause Financials bonds to outperform equity. While we generally agree, this sentiment has been discussed for the past two years. We believe the speed of the divergence over the past month is notable and is bullish for financials equity. We continue to recommend selling BAC and JPM Jan-2013 strangles to benefit from further implied volatility relaxation.

Below, we show the “upside to model price” for each of the major S&P sector based on a log-level regression from 2003 to 2009. Again, while we do not place huge stock in the absolute over/undervaluation shown for each S&P sector, we believe this is a reasonable way to track moves over time.

(3) Investors expect lower volatility for Financials. Seven of the top 10 volatility decliners were in the financials sector (AXP, PNC, COF, EV, BAC, BEN, and WFC).

And the next topic of note is something we have touched upon before: Skew.

While the volatility priced into index options is moderate relative to history, the downside skew to that volatility remains elevated. Options continue to price in higher potential for a sharp down-move than a sharp up-move. Investors interested in hedging at these levels are likely to find put spreads more attractive than normal for the SPX and single stocks with high skew. S&P 500 normalized skew at the index level is above average over the past ten years.

Consumer Staples and Technology have the highest normalized skew of the 9 major sector ETF’s. CDS spreads are also elevated in these sectors as investors see the potential for M&A to drive increased leverage and risk in these sectors. Highlighted single stocks with unusually high skew include PM, KO, PEP (Staples), NSM, NFLX, ORCL, IBM (Technology).

Financials and Utilities have the lowest skew as investors see downside risk as less likely than normal. For Utilities, a recent rise in call premiums has been a contributor to the drop in normalized skew. Highlighted single stocks with low skew are BAC (Financials) and PGN (Utilities).

Full report for the options mavens below:

Goldman Derviative Desktop

 

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Tue, 04/26/2011 - 14:17 | 1208485 SheepDog-One
SheepDog-One's picture

My brother stopped by the other day and wanted to upload a video on my channel, WARNING, not for all audiences, rated X, no holds barred, and vulgarity abounds.
http://www.youtube.com/watch?v=bpZpQHmWlaw&feature=feedf

Tue, 04/26/2011 - 14:25 | 1208512 Sudden Debt
Sudden Debt's picture

is that your brother?

 

I think he needs his medicine :)

Tue, 04/26/2011 - 14:27 | 1208519 SheepDog-One
SheepDog-One's picture

No thats just what people who ARENT on medication talk about. I know its rare in this world society to see someone NOT on 3 anti depressants at once. Shocking stuff to see a person who actually gets it.

Tue, 04/26/2011 - 14:36 | 1208553 Sudden Debt
Sudden Debt's picture

gets it? :)

 

Whenever a company sells a product to another company, like say the oil he talks about, the first pays a tax indeed but gets that refunded. In the end, only the the consumer pays the tax. (he who consumes the product)

Otherwise our products would cost about 10 times more.

These kind of guys do need medication and a quick lesson in economics.

That's what's the actual problem is today with most people: They lack even the simplest basics of economics.

I stopped watching in the midst of his tax "explanation" but I bet it didn't get better than that.

 

Tue, 04/26/2011 - 14:56 | 1208624 SheepDog-One
SheepDog-One's picture

Yea, you pay 90% tax at least...and not only that but whatever youre buying youve ALREADY PAID FOR! Your FRN's are DEBT ITSELF! Most people cant handle the truth. You all think youre rich, when all you really have is debt under a US Corporation.

Tue, 04/26/2011 - 14:55 | 1208617 Banjo
Banjo's picture

SheepDog-One: I doubt a conversation with Noam Chomsky, Nelson Mandela or "pick your favorite political thinker" would be talking so much about dick in the ass. In fact without these four words the video would only be 20 seconds long.

So he doesn't like the current system. Neither do I what is he doing about it? What organisations or political movments is he involved in. Where is his blog.

The last bit on we deserve it he don't care what they do to us we deserve it. Wow where do I sign up for such insight does he have a news letter I can subscribe to?

I think he is probably a big time sheep that got burned in the market crash and subsequent economic downturn probably with buckets of debt or rent to pay. Has an entitlement mentality and wants to rant and blame others.

Tue, 04/26/2011 - 14:57 | 1208625 Loose-Tools
Loose-Tools's picture

Earlier in my life I tried to "get with the program" and be a good sheeple in the career (corporate) and organized religion arenas. Both entities were control freaks. I even went the "brain numbing" route of anti-depressants, probably because the "penetration" by both entities was so deep it went clear up into my skull. I am a thinking individual now, free from "medication", and have removed all "anal probes" permanently. So, I can understand what the man is saying (I just don't have the hatred component).

Tue, 04/26/2011 - 14:43 | 1208579 Dingleberry Jones
Dingleberry Jones's picture

LOL! I was thinking the same thing. I could only take a few seconds of that.

Tue, 04/26/2011 - 14:55 | 1208627 SheepDog-One
SheepDog-One's picture

Oh, well most sheeple have the same reaction to hearing what they really are. Not surprising.

Tue, 04/26/2011 - 15:59 | 1208857 Dingleberry Jones
Dingleberry Jones's picture

The content was unoriginal, disorganized, and naive. And that was just the first minute. If you want to be taken seriously, take some time and prepare your thoughts, write a script, do some research, clean yourself up, and learn how to present to a camera.

As stupid or "sheeple" like as it sounds, presentation style points do matter. Ease of ingestion of information lowers the barrier for an idea to seep into someone's subconcious.  Only the rare off the cuff rant ever works. 

Tue, 04/26/2011 - 17:22 | 1209202 daneskold
daneskold's picture

This makes more sense than yours Dawg.

 

http://www.youtube.com/watch?v=CD2LRROpph0

 

 

Tue, 04/26/2011 - 17:23 | 1209204 daneskold
daneskold's picture

.

Tue, 04/26/2011 - 17:23 | 1209205 daneskold
daneskold's picture

.

Tue, 04/26/2011 - 14:54 | 1208526 SheepDog-One
SheepDog-One's picture

BTW, Goldman Sachs....I hope you all meet with the worst long drawn out painful deaths imaginable, then fry in hell forever.
Oh Goldman Sachs employee dropped by to junk? Up your ass sideways.

Tue, 04/26/2011 - 15:19 | 1208700 buzzsaw99
buzzsaw99's picture

+1 die squid die

Tue, 04/26/2011 - 14:30 | 1208529 fbrothers
fbrothers's picture

In their disclosure they tell you they have a conflict of interest. That could effect the objectivityof the report. Duh? Does that mean it is all BS?

Tue, 04/26/2011 - 14:44 | 1208554 Mercury
Mercury's picture

While the volatility priced into index options is moderate relative to history, the downside skew to that volatility remains elevated.

How much is this the market accurately pricing specific risks and how much of it is spillover from increased "black swan"/Taleb awareness (all the cool kids are hedging this way) in the last few years I wonder?

The predictive track record of SKEW doesn't seem all that great particularly: http://www.cboe.com/micro/skew/documents/SKEWFAQ.pdf

Tue, 04/26/2011 - 14:46 | 1208583 mynhair
mynhair's picture

Investors?  What are those?

Tue, 04/26/2011 - 15:31 | 1208756 SheepDog-One
SheepDog-One's picture

You know, Bernanke and Geithner.

Tue, 04/26/2011 - 14:54 | 1208613 slewie the pi-rat
slewie the pi-rat's picture

thank you, tyler.  this is pretty funny.  i haven't the time for the dumpster diving option maven read, right now, dammit!

my fave part is where the banksters and financials have less volatility, given the skew!

whenever i read this shit, i think:  mark to market?  probably not for at least another decade. 

Tue, 04/26/2011 - 15:32 | 1208761 SheepDog-One
SheepDog-One's picture

Mark to market is ancient history, never see that again.

Tue, 04/26/2011 - 15:11 | 1208670 ivars
ivars's picture

Yes, DJIA will tank soon and for long time:

http://saposjoint.net/Forum/viewtopic.php?f=14&t=2626&st=0&sk=t&sd=a&sta...

 

 

Tue, 04/26/2011 - 15:30 | 1208743 Careless Whisper
Careless Whisper's picture

Mister Gregory, Phd, gives excellent advice. It's always in your best interest to listen to him and GoldmanSachs. They always look out for their clients, sans Timberwolf I.

February 2009:

A report, which was written by Krag Gregory and John Marshall, was distributed to clients of Goldman Sachs earlier today. The report advocated buying March 825 puts and selling March 745 puts on the S&P 500, which would create a "bear put spread".

http://www.davemanuel.com/2009/02/02/goldman-sachs-to-clients-bet-agains...

 

Tue, 04/26/2011 - 15:33 | 1208757 ZeroPower
ZeroPower's picture

From Feb 2009. Probs did quite well doing that since market bottomed in March.

Tue, 04/26/2011 - 15:58 | 1208852 Careless Whisper
Careless Whisper's picture

well i didn't see any mention of a two week spread. but i did see this:

The report stated that "our U.S. economics team sees little evidence that the downward spiral is abating".

Tue, 04/26/2011 - 18:53 | 1209498 ZeroPower
ZeroPower's picture

Youre joking, right?

They were near month puts. Pay for some extra theta as a safety and boom, you were in the money big near beg of March.

Tue, 04/26/2011 - 16:23 | 1208954 Downtoolong
Downtoolong's picture

We use several statistical methods including … log levels over long periods of time, and techniques … such as Vector Error Correction models (VECM).

“ Boss, I just closed our largest sale of the year to Intel, and it looks like IBM is on deck for another sale at least that size. “

“That’s great Smithers. Unfortunately, Goldman tells me our log levels are in the toilet and our vector errors are all skewed out of whack. It looks like we’ll be closing our doors soon.  

Tue, 04/26/2011 - 16:42 | 1209068 scratch_and_sniff
scratch_and_sniff's picture

lol VECM, soon to be predicting the future in a town near you.

Wed, 04/27/2011 - 04:07 | 1210397 Hephasteus
Hephasteus's picture

I bet you they do about as well at vector error correction as a late model chevy cruize with no steering wheel.

Tue, 04/26/2011 - 16:49 | 1209119 slaughterer
slaughterer's picture

THESE are their "top trading themes"!!!  What dipshits.  Short GS immediately.  They are fucking brainless.


#1 Tablets drive change in the PC landscape: Buy calls on likely winners as investors evaluate 10 tablet launches in 2011; sell calls on traditional PC exposed names.

#2 Consumer buy-writes are attractive: Our analysis shows consumer stocks tend to rise but lag the broad market at this phase in the cycle.

#3 Energy calls are inexpensive relative to upside volatility potential; we identify the top nine call buying opportunities based on price targets, earnings growth, and multiple expansion potential.

#4 M&A: We identify options trades on 7 stocks to benefit from potential deal announcements

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