2010 stock market forecast - predicted long-term decline in chinese market and economy

Equity Derivatives Strategy January 27, 2010 ***Disclaimer: Option trading involves risk and is not suitable for all investors. Ticonderoga Securities LLC makes no guarantee that the option strategies promoted will accomplish the stated objectives. Options trading is considered speculative and may result in the loss of any or all of your initial investment, and/or funds in excess of the principal invested. Prior to buying or selling an option, you should reference the Characteristics and Risks of Standardized Options, “Option Disclosure Document” (ODD). All clients must receive a copy of the ODD prior to conducting any option trades. For more information, contact your broker or visit the Options Clearing Corporation risk disclosure webpage located at the following link: http://www.optionsclearing.com/about/publications/character-risks.jsp IN THE MONEY - Tactical Intelligence Today Ryan Renicker, CFA (212) 906-7503 [email protected] Forecast: 2004 All Over Again? Home in The Range, Upside Bias. SPX 1,300 by YE. Our year-end target price for the SPX is 1,300. Market stuck in relatively narrow trading range. Midterm election looks like a positive catalyst – balance of power in Washington a good thing. America the Beautiful. Fund Flows into US and A! Investors are reversing course – taking profits in Emerging Markets and re-allocating winnings into U.S. assets. Long SPY / short FXI (China) a winning trade. Long SPY / short EEM (Emerging Markets) also makes sense. Tech continues to outperform SPY; XLB (Materials) lags. KRE (Regional Banks) outpace XLF (Large Cap Financials). Volatility Storm” Ends. VIX Declines Further. Volatility should continue to trend lower in a sideways market. Sector selection more relevant; market timing less. As a result, single-stock option volume rebounds. Sector ETF options en vogue in 2010. VIX options garner more interest as hedging vehicle. “Uncertainty Risk Premium” Implodes. Fear Subsides. Implied and realized volatility should converge as “noise” subsides (earnings season). SPY 20-day realized volatility hovers between 10%-15% in 2010. SPY 1-month implied volatility hovers between 13% - 18% in 2010. Data sources: Bloomberg and Ticonderoga Securities Equity Derivatives Strategy. Trade Idea Update: China’s Great Wall of Worry - I remain bearish on China and reiterate a Long SPY / Short FXI trade. - The great wall of worry remains intact and is likely to gain momentum in the coming weeks. - Evidence continues to mount that the “Chinese Miracle” is really a mirage – inefficient uses of capital + lack of transparency = risk! - Despite this, the options market continues to price in relatively low downside risk for the FXI. - In fact, the FXI 1-month 25 delta put – 50 delta implied volatility spread remains below 3 volatility points (this spread has traded as high as 14 volatility points during the past year). Exploit this by purchasing (these cheap) puts as a bearish play. Specifically, consider going long the FXI Mar. 35 puts (cost ~ $0.90). This trade makes money if FXI trades at or below ~ 34.10 as of the Mar. 20 expiry. Call for details.

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Page 1: 2010 Stock Market Forecast - Predicted Long-Term Decline in Chinese Market and Economy

Equity Derivatives Strategy January 27, 2010

***Disclaimer: Option trading involves risk and is not suitable for all investors. Ticonderoga Securities LLC makes no guarantee that the option strategies promoted will accomplish the stated objectives. Options trading is considered speculative and may result in the loss of any or all of your initial investment, and/or funds in excess of the principal invested. Prior to buying or selling an option, you should reference the Characteristics and Risks of Standardized Options, “Option Disclosure Document” (ODD). All clients must receive a copy of the ODD prior to conducting any option trades. For more information, contact your broker or visit the Options Clearing Corporation risk disclosure webpage located at the following link: http://www.optionsclearing.com/about/publications/character-risks.jsp

IN THE MONEY - Tactical Intelligence Today

Ryan Renicker, CFA (212) 906-7503 [email protected] Forecast: 2004 All Over Again?

Home in The Range, Upside Bias. SPX 1,300 by YE.

Our year-end target price for the SPX is 1,300. Market stuck in relatively narrow trading range. Midterm election looks like a positive catalyst –

balance of power in Washington a good thing.

America the Beautiful. Fund Flows into US and A!

Investors are reversing course – taking profits in Emerging Markets and re-allocating winnings into U.S. assets.

Long SPY / short FXI (China) a winning trade. Long SPY / short EEM (Emerging Markets) also makes

sense. Tech continues to outperform SPY; XLB (Materials)

lags. KRE (Regional Banks) outpace XLF (Large Cap

Financials). Volatility Storm” Ends. VIX Declines Further.

Volatility should continue to trend lower in a sideways market.

Sector selection more relevant; market timing less. As a result, single-stock option volume rebounds. Sector ETF options en vogue in 2010. VIX options garner more interest as hedging vehicle.

“Uncertainty Risk Premium” Implodes. Fear Subsides.

Implied and realized volatility should converge as “noise” subsides (earnings season).

SPY 20-day realized volatility hovers between 10%-15% in 2010. SPY 1-month implied volatility hovers between 13% - 18% in 2010.

Data sources: Bloomberg and Ticonderoga Securities Equity Derivatives Strategy.

Trade Idea Update: China’s Great Wall of Worry

- I remain bearish on China and reiterate a Long SPY / Short FXI trade. - The great wall of worry remains intact and is likely to gain momentum in the coming weeks. - Evidence continues to mount that the “Chinese Miracle” is really a mirage – inefficient uses of capital + lack of

transparency = risk!

- Despite this, the options market continues to price in relatively low downside risk for the FXI. - In fact, the FXI 1-month 25 delta put – 50 delta implied volatility spread remains below 3 volatility points (this spread

has traded as high as 14 volatility points during the past year).

Exploit this by purchasing (these cheap) puts as a bearish play. Specifically, consider going long the FXI Mar. 35 puts (cost ~ $0.90). This trade makes money if FXI trades at or below ~ 34.10 as of the Mar. 20 expiry. Call for details.

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