EFTA01116955.pdf

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  Apple stock price performance I Average stock price performance by day of week Statistical significance over time AAPL's daily stock return 0.7% 2008 to 2010 has exhibited statistically — To test for statistical significance, we ran yearly significant correlation to • APPle regressions of AAPL's daily stock returns versus whether the day of the week since 0.5% • S&P 500 the day was a Friday or Monday 2011 — We calculated the p-value for the day variable 0.3% 0.25% — The p-value is a measure of the probability that the Monday's outperformance 0.20% return is not correlated with the variable L., 0.16% is greater and more 0.11% — For example, a p-value of 0.01 means there's only a 1% statistically significant 0.1% chance that the return is not correlated with the variable I ° °6- A than Friday's — A lower p-value means more statistical significance underperformance (0.00%) (0.1%) 0.06%) — Monday's p-values declined since 2008 and the variable (0.04%) showed very strong statistical significance since 2011 (0.17%) (0.3%) — Friday's p-values also declined, but to a lesser extent and Monday Tuesday Wednesday Thursday Friday have increased again in 2013 and 2014 Weekly options in 0.7% 2011 to Present AAPL 0.58% 0.80 o Zrr (June 2010) • Apple 0 0.5% - 0.70 • S&P 500 "it 0.60 0.30% 0.3% - 0.50 19% 0. 0.40 O 0.10% O 0.1% - 0.07% 0.30 0.20 C•I O (0.1%) - (0.02%) 0 0 (0.05%) 0.10 O gr; (0.01%) (0.13%) (0.16%) 0.00 ete q.tp-sb r6) (0.3%) Monday Tuesday Wednesday Thursday Friday . Fticlay —a—Monday ti Deutsche Bank Source: Bloomberg (for stock prices. dividend history, and index prices). as of November 3. 2014 2 Equities EFTA01116956  Apple stock price performance (continued) I Value of Monday's outperformance vs S&P 500 Value of Friday's underperformance vs S&P 500 Trading this pattern would 900 900 have resulted in 800 800 - significant gains with 700 700 - limited downside risk 600 - 600 - This analysis looks at 500 Weekly options in 500 - Weekly options en trading AAPL stock and 400 AAPL list 400 - AAPL lest (June 2010) (June 2010) an equivalent value of the 300 300 - S&P 500 beginning in 200 200 - 2008 100 100 -0 •"•••sarsa 0 0 Going long AAPL / short Gt. PO, ci.") AA At , A 41, S&P 500 only on 004 C; C; c; Q&; it; eaci Oe' O46 ° es Oes ge ge ge Mondays produces the largest gain — over 2x a long/short strategy held Combined Friday / Monday performance vs S&P 500 Long AAPL and short S&P 500 over all days and over 3x 900 900 - a short AAPUlong S&P 800 800 - 500 strategy on Fridays 700 - 700 600 600 - Combining the two strategies (Monday and 500 500 - Weeky options in Weeky options it Friday) results in even 400 AAPL 1;st 400 - AAPL Sst 300 (June 2010) 300 - (June 20': greater returns 200 200 - 100 100 0 ! 0 CS\ @ 0 ,\I\ <k 0 6;:, 0 NA ".. ci Oec c./ O121 Oe' C. ce oeci OeG Oes° OeCi 0 04 0 6: O e' 004 Deutsche Bank 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 3 Equities (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. EFTA01116957  Overview of Weekly options Weekly options in AAPL stock began to be listed in • The CBOE launched Weekly options in October 2005. These were originally only on the History S&P500 June 2010 • The CBOE expanded the product in June 2010 to include more underlyings This coincides roughly • Since June 2010, Weekly options are listed before the open on Thursdays with the development of Listing • Currently, the AAPL Weeklys are part of the "expanded" program and have 6 expirations. A the Friday / Monday trading pattem 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 • We have found little evidence of institutional trading in these options • This means the majority of trading is done by: Trading — High frequency traders — Retail investors Deutsche Bank 4 Equities EFTA01116958  Analysis of OBOE AAPL option trading data(a) Summary activity of directional market participants (i.e., retail investors) Opening versus closing transactions for The CBOE has data on - Since the Monday / Friday phenomenon directional market participantsm each option trade and coincides with the listing of weekly options, 70% designates the buyer and we focused on options with the shortest expiry 65% seller of options as either 60% "customer" or -firm". We it 55% attribute "customer" — Consistent with a hypothesis that Monday's 2 50% transactions to directional outperformance is due, at least in part, to 45% retail investors, and "firm" retail investors initiating option positions, the 40°A. transactions to hedged ° 35% vast majority of directional option trades on 30% market participants Mondays were opening transactions 25% 201/ The dataset has certain Monday Tuesday Wednesday Thursday Friday limitations: — In addition, the majority of the positions that % of option trades that opened positions - The CBOE is only one were opened were bullish transactions, - — %of option trades that closed positions of several exchanges which would have caused a hedged market that list options (with participant to buy shares Bullish opens versus bearish opens for -20% of total volume) directional market participantsm - Market maker trades 50% are excluded — By Friday, the majority of option trades were closing transactions L 40% - The data does not have time stamps (which it it 30% would have allowed us - Since the majority of option trades were to see whether trading bullish positions, closing these positions is clustered during a a 20% would have caused a hedged market certain part of the day participant to sell shares 10% and compare this to the stock's intraday 0°/ behavior) Monday Tuesday Wednesday Thursday Friday ■ Bullish opens (buy calls / sell puts) • Bearish opens (sell calls / buy puts) Deutsche Bank (a) Source: www.marketelataexpress.com. 5 Equities (b) From July 2010 to February 2014. Based on options with the shortest expiry. EFTA01116959  Net "delta" in AAPL listed option market DB analyzed every AAPL — Option traders will hedge their positions by trading in the underlying stock to maintain a "delta" neutral listed option trade that position to stock price performance (i.e., sell calls and buy stock such that they are indifferent to changes occurred from January in the stock price) 2013 to February 2014 — Looking at the net deltas of actual option activity shows that Fridays are more likely to see selling activity, These trades were while Mondays are more likely to see buying activity classified as bullish or ANerage net delta bearish depending on On shares) % of days negative % of days positive whether they traded at the Friday (99.292) 63.8% 36.2% bid or the offer. So, for Monday 131.618 39.7% 60.3% example, a call that traded on the offer side was Other (373.363) 56.0% 44.0% deemed a bullish trade. — Even though the amount of stock is small relative to Apple's ADTV of 10 - 15mm shares, there is a strong We ignored transactions correlation between this activity and the stock return on the relevant day of the week(a) that traded at mid market Fridays — return vs net delta Mondays — return vs net delta Other days — return vs net delta(b) We then delta-weight this activity to capture a 5% directional view of the 4% overall options market 3% 2% 1% tc 0% Co (1%) • R2 = 0.7548 • • (23t) • • **6 • (3%) • • • (4%) 0 500 1.000 (1,000) (500) O 500 1.000 Net delta (sold) bought Net data (sold) bought Net della (sold) bought Deutsche Bank Source: tradealartcom 6 Equities (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 EFTA01116960  AAPL option volume analysis(a) I 60-day moving average of Apple stock and option 60-day moving average volume in options (in 000s) volume (based on underlying shares) Trading in AAPL options 1200 (calls and puts) has 600% 60 Weekbe option:, 11.fueic(/ upt,: ns doubled from 2010 to AAPL Asf 1000 AAPL kst June 2014 (June 2010) 500% 50 (June 20:0 s 800 400% 40 The underlying shares that these options aa 600 300% represent are larger than the stock volume — delta 400 a ° 200% adjusted, though, the volume would be about 25-50% based on recent 200 100% data 0 0% 0 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Apple's open interest as a Apple S8P500 -- Shares underlying options — AAPL stock volume percent of its outstanding Ratio of calls to puts Top 10 S&P 100 companies by option open interest(b) stock is higher than any 1.80x Oman open i other S&P 100 company 1.66x MaMei cap [merest as % Ra:o ol calls and its ratio of calls to 1.60x 1.43x 1.47x 1.34x Rack OEXlndex Company ol shares to pits puts is higher than the 1.40x 1.28x 1 AAPL 1hV Equty Awe it 5479 27.4% 1.49x 1.18x 1.20x broader market as well as 1.20x 2 FB UW Equily Fxebxk Inc $173 16.0% 1.61x the average S&P 100 3 GOOG OW Equty Gorge Inc 5404 13.1% Lott 1.00x 4 GAI UN Equhy General lAotom Co $57 11.9% company 5 CAT UN &iry Caterpillar he $61 11.5% Lou 0.80x 0.69x 0 61 0.59x 0.60 0.58x 0.61x 0.56x 6 APC UN Equty Anadarko Petroleum Cap 342 10.3% 216x 0.60x 7 AIAZN LW Equity Amazon.ccm he $160 9.2% 0.99x 0.40x 0.20x 0.00x 2008 2009 2010 2011 2012 •AAPL •S&P500 2013 I 2014 YTD 8 FCX UN Equity 9 HAL UN Ecady FreeportAlcMoRan Copper 8 Gdd he Hanlon Co 10 EBAY UW Eel* °Bay Inc Menge - to 10 Menge all 100 $34 346 $71 8.7% 7.9% 7.6% 12.4% 3.7% 1.01x 1.28x 1.81x 1.37x 1.32a Deutsche Bank Source: Bloomberg. 7 Equities (a) As of June 6. 2014 (b) Noe averaged over any time palled 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 a Equities EFTA01116962  Strategy Implementation I Monday outperformance vs SPY Friday underperformance vs SPY DB proposes a strategy 800 - 800 referencing the combined 700 Ann_ agium Volatility Sharpe Batto 700 Ann. Return Volatility Shame Ratio return of the Friday and 138 to '10 11.5% 14.2% 0.81 '08 to '10 1.2% 14.6% 0.08 Monday trades with gains 600 '11 to Present 30.6% 11.5% 2.67 600 '11 to Present 13.4% 8.4% 1.59 or losses reinvested in the 500 500 strategy on a daily basis 400 400 (alternatively, a strategy on Monday-only could 300 300 also be implemented) 200 200 100 100 Strategy will use SPY, the 0 0 SPDR S&P 500 ETF, to replicate the S&P 500 0z) O O% O mA O"cf cf O" ' total return O o° O°Q- O° o° o° O° O° O°Cr O° O° Combined Friday / Monday performance vs SPY Annual Returns Strategy assumes dividends are reinvested 800 Ann. Return Volatility ShaiReitali0 80% • Monday 408 to 1 0 12.8% 19.9% 0.64 on the ex-date 700 - 70% - • Friday '11 to Present 48.2% 12.5% 3.86 60% - 600 - 50% - • Combined Strategy incorporates a LI 40% - transaction cost of 500 - 30% - 0.002% per execution on 400 - 20% % - notional amount executed 10 - 300 0% 200 - a - -20% 100 2014 2008 2009 2010 2011 2012 2013 YTD 0 Monday -7.6% 27.3% 18.0% 33.1% 47.0% 23.5% 32.8% 5§ 4:$ Friday 16.8% -9.5% -1.7% 2.5% 19.5% 27.4% -0.1% eP 4' O.c. e ct Oect Combined 8.0% 15.2% 15.9% 36.5% 75.7% 57.4% 32.7% Deutsche Bank 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 9 Equities tosses in the strategy. Source: Deutsche Bank. Bloomberg Finance L.P.. as of November 3. 2014 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. The information contained herein is provided solely for Your internal use on the basis that You have such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks associated with such information. Investments in products and strategies described herein could incur substantial loss and may not be suitable for all investors. Other alternatives may be available, including through other dealers. You should make an independent assessment, in consultation with Your tax, legal, accounting and other advisors, of the information herein in light of Your own objectives and circumstances. The ultimate responsibility for Your decision to rely on information contained herein rests solely with You. The information herein has been compiled from sources believed to be reliable, including third party depositories and/or other information vendor sources, and may include calculations based on algorithms (including inputs. methodology and output) that are designed. maintained and/or managed by third parties. Deutsche Bank does not guarantee the accuracy and/or completeness of the information contained herein and shall not be held liable for any errors. omissions or misinterpretations. Deutsche Bank has no obligation to update. modify or amend the information provided herein. Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner that is inconsistent with information that is contained in the attached materials. DEUTSCHE BANK SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, SPECIAL OR OTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANY RELIANCE ON THE INFORMATION CONTAINED IN THESE MATERIALS. The distribution of this document and availability of these products and services in certain jurisdictions may be restricted by law. You may not distribute this document. in whole or in part. without our express written permission. DB is authorized under German Banking Law (competent authority: BaFin - Federal Financial Supervising Authority) and regulated by the Financial Services Authority for the conduct of UK business. In the US this document is approved and or distributed by Deutsche Bank Securities Inc.. a member of the NYSE.FINRA.NFA and SIPC. Past Performance The past performance of securities. indexes or other instruments referred to herein does not guarantee or predict future performance. Deutsche Bank may hold positions We or our affiliates or persons associated with us or such affiliates may: maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell. make a market in. or engage in any other transaction involving such securities, and earn brokerage or other compensation. 019910 111114 Deutsche Bank 10 Equities EFTA01116964  Disclaimer BacktestiN The backtesting results enclosed herein do not represent historical prices. The models reflects historical payout and doe