Cherry Picks

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Nov 21, 2017 - A high correlation with the Nasdaq (QQQ) of nearly 0.91, but almost identical implied volatility means we
November 21, 2017 Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest.

Tom is Trading the NOB Spread. Besides working on his sweet dance moves this week, Tom is trading the yield curve — more specifically, he is long the NOB spread. This means he believes duration between the 10s and 20s is relatively flat, but may steepen in the future. The ratio he is trading makes for a delta neutral ratio: Long 5x the 10-year notes (/ZN) and short 2x the 20+ bond (/ZB). He is also long 9 of the 5-year note (/ZF) and short 2x the 30+ year bond (/UB). The plot at the bottom of the page helps to explain the logic. Historically, the yields at different durations have been considerably greater than it is now. Using the futures, he is betting on the spread widening back to historical averages. What Else is Tom Trading? Tom has short premium in a number of stocks — specifically Wal-Mart (WMT) and Microsoft (MSFT). Both of these positions has a “hint” of short delta in them, mainly because of the earnings run-up over the past couple of weeks.

As seen from this plot of yields, the difference between shorter and longer durations has historically been steeper than it currently is. Tom’s trade looks for the curve to revert back to historical averages.

Holiday Trading Schedule Trading has historically been light on holiday weeks — we expect this year to be no different. Be careful about liquidity. Holiday Calendar Equities/ Stocks

Thursday closed all day

Futures (Equities)

Thursday closing 12 pm CST, reopens 5 pm CST

Futures (FX, Interest Rates, Energy, Metals)

Thursday closing 12 pm CST, reopens 5 pm CST

Friday early close at 12 CST

Friday open until 12:15 pm CST

Friday open until 12:15 pm CST

We welcome comments/feedback. Best of luck in this week’s trading and have a happy Thanksgiving! Michael Rechenthin, PhD Kai Zeng [email protected]

Nov 2013 Nov 2014 Nov 2015 Nov 2016

Nov 2017

Nov 2012

3-Month Correlation Matrix of Price Returns

What Do We Find Interesting in the Correlation Matrix? • Silver (SLV) and the Utilities etf (XLU) both continue to provide theoretical diversification to the overall S&P 500 (SPY) market. • The Oil Services etf (OIH) has been relatively flat over the past month — Implied volatility rank is relatively high at 40%. Correlation with the S&P 500 (SPY) is relatively week at +0.20. • We are continuing to keep our sizes relatively small in the metals — low correlations provides theoretical diversification, yet the low implied volatilities provide only a slim edge in our trading strategies. Silver (SLV) has a correlation of -0.13 and Gold (GLD) a correlation of -0.31 with the S&P 500. • Tech (XLK) is up nearly 5% over the past 1 month. A high correlation with the Nasdaq (QQQ) of nearly 0.91, but almost identical implied volatility means we don’t have much of an edge in trading this sector etf over QQQ. • Expect to see the relationship between the major market indices, S&P 500 (SPY), the small-cap Russell 2000 index (IWM), and the Nasdaq (QQQ), strengthen if we begin to have some selling in the market.

 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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Where We See Potential Opportunity. • The Regional Banking etf (KRE) continues to have a nice combination of higher than average IV Rank along with high implied volatility. Options can be a bit illiquid at times though. • Brazil (EWZ) has a nice combination of high implied volatility (e.g. nearly 3x as much premium as the S&P 500) and historically expensive options (i.e. high implied volatility rank) • Consumer Staples (XLP) and the China etf (FXI) both have IV Ranks above 40%. • Miners (XME) is down 6%, and although IV Rank may not be as high as we’d like, its options have a lot of premium due to high IV

DIA EEM EFA EWZ FEZ FXI GDX GDXJ GLD IWM KRE OIH QQQ SLV SPY TLT XBI XLB XLE XLF XLI XLK XLP XLU XME XOP XRT

Dow Emerging Index Fund MSCI EAFE Brazil Euro Stoxx 50 China Large Cap Gold Miners Junior Gold Miners Gold Russell 2000 ETF Regional Banking Oil Services Nasdaq 100 Silver S&P 500 20+ Year Treasury Bond ETF Biotech Materials Energy Select Sector Financial Industrial Tech Consumer Staples Utilities Metals and Mining Oil & Gas Explor. & Prod. Retail

 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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Upcoming Earnings

Symbol

Description

Expected Report Date Time of Day

Weekly In In S&P In Russell In tastytrade Options Dow? 500? 2000? Watchlist?

CRM

Salesforce.com Inc

Tue Nov-21

After Close

Yes

-

Yes

-

-

HPE

Hewlett Packard Enterprise

Tue Nov-21

After Close

Yes

-

Yes

-

-

HPQ

HP

Tue Nov-21

After Close

Yes

-

Yes

-

Yes

DE

Deere &

Wed Nov-22

Before Open

Yes

-

Yes

-

-

TIF

Tiffany & Co.

Wed Nov-29

Before Open

Yes

-

Yes

-

-

Historical Earnings Moves for Select Stocks It is often nice to examine historical moves in stocks around earnings. At the very least, it provides some context.

Historical Price Move From Immediately Before Earnings to that Friday's Expiration 2nd Q 2017

1st Q 2017

4th Q 2016

3rd Q 2016

2nd Q 2016

1st Q 2016

4th Q 2015

3rd Q 2015

2nd Q 2015

1st Q 2015

CRM

1%

-0%

1%

3%

-5%

4%

12%

5%

2%

7%

HPE

-7%

-7%

-7%

2%

-5%

12%

14%

5%

HPQ

2%

-3%

9%

-5%

-0%

8%

-2%

-14%

0%

3%

DE

-5%

7%

1%

13%

13%

-5%

-4%

4%

-8%

4%

TIF

-1%

-7%

3%

4%

7%

-2%

3%

4%

-2%

10%

* Largest historical increases were highlighted green; largest historical decreases were highlighted red.

 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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Stocks and ETFs with an upcoming dividend. In the money short call options are the only options at risk of additional early assignment due to the dividend. If the extrinsic value of the in the money short call is less than the dividend, the option is at (a greater than average) risk of being assigned.

Ex-Dividend Date

Dividend Per Share

In Dow?

In S&P 500?

3M

Wed, Nov 22

$1.18

Yes

Yes

-

-

LB

L Brands

Wed, Nov 22

$0.60

-

Yes

-

-

NVDA

NVIDIA

Wed, Nov 22

$0.15

-

Yes

-

-

JNJ

Johnson & Johnson

Mon, Nov 27

$0.84

Yes

Yes

-

-

HD

Home Depot

Wed, Nov 29

$0.89

Yes

Yes

-

Yes

UNP

Union Pacific

Wed, Nov 29

$0.67

-

Yes

-

-

STI

SunTrust Banks

Wed, Nov 29

$0.40

-

Yes

-

-

ENR

Energizer Holdings

Wed, Nov 29

$0.29

-

-

-

-

CA

CA

Wed, Nov 29

$0.26

-

Yes

-

-

YUMC

Yum China Holdings

Wed, Nov 29

$0.10

-

-

-

-

PSEC

Prospect Capital

Wed, Nov 29

$0.06

-

-

-

-

CSX

CSX

Wed, Nov 29

$0.20

-

Yes

-

Yes

ABX

Barrick Gold

Wed, Nov 29

$0.03

-

-

-

-

GS

Goldman Sachs Group

Wed, Nov 29

$0.75

Yes

Yes

-

Yes

Symbol

Description

MMM

 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

In Russell In tastytrade 2000? Watchlist?

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Some of the Highest Viewed Shows Include: Date

Segment

Title

Link

Fri, Nov 17

Market Measures

Currencies and Equities

LINK

Fri, Nov 17

Resize & Analyze

Week of November 13th

LINK

Fri, Nov 17

tasty Extras

Goldman's Top Trades for 2018

LINK

Fri, Nov 17

Closing the Gap - Futures Edition

Is the Yield Curve a Red Flag?

LINK

Thu, Nov 16

Market Measures

Managing Winners and Volatility

LINK

Thu, Nov 16

Options Jive

Does Theta Have Character?

LINK

Thu, Nov 16

Trades From the Research Team LIVE

Trades From the Research Team LIVE

LINK

Wed, Nov 15

Market Measures

Optimal Debit Spread Mechanics

LINK

Wed, Nov 15

Scalping

Scalping 2017: Part 1

LINK

Wed, Nov 15

tasty Extras

Sosnoff Says | Cryptocurrencies

LINK

Wed, Nov 15

tasty BITES

Trading Sector ETFs

LINK

Tue, Nov 14

Market Measures

Depressed Market Moves

LINK

Tue, Nov 14

Options Jive

How High IV Rank Helps

LINK

Tue, Nov 14

Strategies for IRA

Making Options Efficient in an IRA

LINK

Mon, Nov 13

Market Measures

Defending Against Large Moves in Options LINK

Mon, Nov 13

Options Jive

SKEW Impact on Position Management

LINK

Mon, Nov 13

Best Practices

Utilizing Bob the Trader

LINK

Fri, Nov 10

Market Measures

The Bitcoin Market

LINK

Fri, Nov 10

Resize & Analyze

Week of November 6th

LINK

Fri, Nov 10

Closing the Gap - Futures Edition

Large Cap vs. Small - Time for a Turn?

LINK

Thu, Nov 09

Market Measures

Delta and Rolling Volatility

LINK

Thu, Nov 09

Options Jive

Calculating Portfolio Leverage

LINK

Thu, Nov 09

Trades From the Research Team LIVE

Trades From the Research Team LIVE

LINK

Wed, Nov 08

tasty Extras

Trade the Headlines: DIS

LINK

Wed, Nov 08

Market Measures

Characteristics & Ideas for Low IV

LINK

Wed, Nov 08

Options Jive

How USO Works

LINK

Wed, Nov 08

tasty Extras

Thoughts on Wealth Creation & Retirement

LINK

Tue, Nov 07

Market Measures

Crude Oil, Oil Stocks & the S&P 500

LINK

Tue, Nov 07

Options Jive

Sizing Trades Efficiently

LINK

Tue, Nov 07

tasty BITES

How Market Moves Affect Buying Power

LINK

Mon, Nov 06

Market Measures

Optimal Risk: Reward in Strangles?

LINK

Mon, Nov 06

Options Jive

Diversifying an Options Portfolio

LINK

Mon, Nov 06

Best Practices

Delta & Direction

LINK

 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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 © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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Reading this Report Expected Range Cone. The following pages show stocks and ETFs that the tastytrade Research Team currently find have relatively high or low volatility.  The colored cone represents a 30-day expected theoretical price range that is calculated from the options’ implied volatilities.  If the implied volatility is relatively high, then the market is expecting a larger price change in the underlying stock or ETF.  From this we can derive the market’s 1 standard deviation theoretical expectation of where prices might be in the future.  In other words, the market is expecting, with a 68% theoretical probability, that prices will fall within the boundary of the cone at the end of 30 days. Cone Color. The color of the cone is significant. The darker the color, the more “extreme” the implied volatility (IV) which is represented by implied volatility rank (IV Rank). This information can help you decide on a trading strategy.

Glossary IV. Implied Volatility is the estimated volatility of a security’s price derived from its option price; the higher the IV, the more expensive the option and therefore the larger the expected price move. IV is an annualized number of volatility, e.g. a IV of 27 means the option’s market is pricing in an annualized price range, either plus or minus, of 27%. IV Rank. IV by itself doesn’t tell us if if the volatility is high or low - but IV Rank does. An IV Rank of 70 means that the IV is 70% between its low and high IV over the past year. The higher the IV Rank, the higher the security’s IV is compared to its past year. We provide six levels to make evaluating easier: • Extremely High: IV Rank between 90 and 100 • High: IV Rank between 75 and 90 • Moderately High: IV Rank between 50 and 75 • Moderately Low: IV Rank between 25 and 50 • Low: IV Rank between 10 and 25 • Extremely Low: IV Rank between 0 and 10 Option Liquidity. At tastytrade we have our own theoretical measure of option liquidity, Poor, Moderate, Good, or Great. It examines the options’ bid/ ask spread, open interest, and the number of strikes with non-zero bids. Correlation with S&P 500. Correlation is a statistical measure of how strong a relationship two securities have with one another. A correlation of -1 means the stocks are perfectly negatively correlated (they move in opposite directions), while a correlation of +1 means the stocks are perfectly positively correlated (they move in the same direction). A correlation of 0 means there exist little relationship. Earnings. The earnings date of the security. In practice we tend to see stocks have a larger amount of implied volatility (IV) nearer to earnings as the market is pricing in the fear of the upcoming earnings announcement. In parenthesis, is BTO or AMC; "Before the Open" or "After Market Closes", respectively. Upcoming earnings dates do sometimes change.

Disclosures Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf tastytrade content is provided solely by tastytrade, Inc. and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Please read Characteristics and Risks of Standardized Options before deciding to invest in options. Futures accounts are not protected by the Securities Investor Protection Corporation (SIPC). All customer futures accounts' positions and cash balances are segregated by Apex Clearing Corporation. Futures and futures options trading is speculative and is not suitable for all investors. Please read the Risk Disclosure for Futures and Options prior to trading futures products found in Disclosures under the Documents tab.  © tastytrade.com, 2017

Michael Rechenthin, PhD | Kai Zeng

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