1. Equity Derivatives Strategy January 27, 2010
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IN THE MONEY - Tactical Intelligence Today
Ryan Renicker, CFA
(212) 906-7503
rrenicker@ticonsec.com 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.

2. Equity Derivatives Strategy January 27, 2010
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