EFTA01365002.pdf

3 December 2013 US Derivatives Spotlight The basics of long-dated calls Better risk-adjusted returns at an attractive price Buying long-dated call options offers benefits to investors seeking equity exposure. They allow for continued upside participation and at the same time provide a floor should the broad market decline rapidly. In this note, we show that longer-dated SPX call strategies have historically provided better risk- adjusted returns compared with buying and holding the broad index. There are several key features of call options that should appeal to a wide range of equity investors: Current pricing: Long-dated calls on the SPX index are priced attractively with levels for both ATM and OTM calls near decade-long lows (see Figure 1) • Embedded risk management characteristics: Call 'delta' (sensitivity of the call's price to spot moves) increases in a rally and decreases in a sell-off. Thus investors get longer as the market moves higher and less long as the market sells off. This convexity property of long options is especially attractive in a market pullback and is a reason why long-dated calls result in higher risk-adjusted returns in our backtests vs long equity only Fitjuro I • Current ioncydatud call option premium 11OM decade long 30% 25% —36M 10095-Strike —36M 120%-Stnice 20% E t 15% a 10% 6% 0% Jan03 Jan-05 Jan-07 Jan-11 Jan-13 San* Puna The note is divided into three parts: Why current pricing on long-dated calls is attractive relative to history • How different long-dated call structures have performed historically. including partly cheapening long-dated calls by selling higher strike calls with the same maturity and by selling 1M calls What is the relative magnitude of the different risks inherent in long call positions Page 2 Deutsche Bank Securities Inc. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0055586 CONFIDENTIAL SDNY_GM_00201770 EFTA01365002