EFTA01434582.pdf

Subject: [/] DB Derivs: Stock Replace Winners ahead of Earnings From: Martin Zeman ‹ > Date: Tue, 17 Jul 2018 14:37:49 -0400 To: "Paul Barrett ( Cc: Stewart Oldfield Lower delta risk during earnings with options This quarter seems to be another where expectations are high and so beats will be shrugged off and misses get punished. Last week we had a note looking at stock reactions to earnings; The initial move on SPX and NDX constituents earnings last quarter were mostly negative, even on beats, before retracing the move higher over the following week or so; misses were hit harder, but also recovered (albeit less). Average 1 day earning move of beats = -0.11% and the average 1 week move -0.01%, but the 1M return was 2.5%: roughly in-line with the SPX return over the period of 2.4% Average 1 day earning move of beats = -1.22% and the average 1 week move -0.74%, but the 1M return was 1.14%: much lower than the SPX return. The question remains if it will look like that again this quarter. The bad NFLX print may be a harbinger to other long-momentum, short-value, or long - growth stocks. Based on last quarter's earnings reactions as well as the possible contagion from factor rotation on the back of Netflix, stock replace winners ahead earnings. SPX & NDX stock replacement candidates based on relatively low vol and outperformance over last 3 months Trades: AMD - Buy Aug 17 strike calls for 96c (ref. 16.55, 48d) o Replacing delta protects 5.8% down, which is the roughly the implied move o Stock has high short interest, so the squeeze potential offers asymmetric risk to the upside o Breakeven is 8.5 % away; implied move is 5.6% but it has historically EFTA01434582 moved —12%, with most big moves to the upside. M — Buy Aug 38 calls for $1.78 (ref. 37.15, 48d) o Replacing stocks protects 4.8% down, more than the implied move (3.2%) o Breakeven is 7% away, but with the elevated short interest squeeze potential can take the stock through breakeven as has happened with retail stocks last earnings season ALXN - Buy Aug 140 calls for $4.20 (ref. 135.60, 41d) o Breakeven is 6.5% away; implied move is 6.84% o Using Aug vol trading lower than the July weeklies right after earnings and allows time for higher earnings drift if this earning season develops similarly to last {cid:[email protected]} Martin Zeman Director I Key Client Partners Deutsche Bank Wealth Management DB Securities Inc 345 Park Avenue, 10154-0004 New York, NY, USA Tel. Mobile Email KCP products and services are intended and available only for persons who are sophisticated institutional investors within the meaning of the FINRA Rule 4512(C)(3), and who are capable of evaluating the strategies, characteristics and investment risks of, and exercising independent judgment in evaluating, the ideas and products discussed herein. Trades and transactions are subject to relevant internal approvals of DBSI or its affiliates prior to execution, and the execution of any transaction or idea discussed herein is conditional on your becoming a client of Deutsche Bank. Key Client Partners (KCP) products, investment ideas and solutions and related matters discussed herein are provided for discussion purposes only, EFTA01434583 and strictly on a non-advisory basis. The KCP Americas desk does not provide investment advice. The information set forth herein is confidential and personal to you and is being presented for your information and for discussion purposes only. Any reproduction and/or redistribution thereof (in whole or in part) or disclosure of its content without our written consent is strictly forbidden. This communication does not create any legally binding obligation on the part of DBSI or any of its affiliates. EFTA01434584