Saxo’s Insights on Futures and OptionsApril 2016

1 | MARKET COMMENTARY .......................................................................................... 03 Two corrections and getting equities right ............................................................................03 The Brexit and the European smorgasbord .........................................................................04 Best business ideas in 2016 ......................................................................................................04

2 | COMMODITY CORNER ............................................................................................. 05 Crude awakening in oil? ...............................................................................................................06 Gold still shining amidst zero interest rates and weak equities .......................................06 Caught from the COT ..................................................................................................................06

3 | PORTFOLIO STRATEGIES ......................................................................................... 07 Charge and bulletproof your portfolio using options ..........................................................07

4 | PRODUCT TEST DRIVE ............................................................................................. 08 Riding VIX weeklys like pro .........................................................................................................08 Inter-market futures spreads now available ..........................................................................08

TABLE OF CONTENTS

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Market commentary (reassessing risk)

By Georgio Stoev, Saxo Bank Product Manager Futures and Options

Equity markets took a plunge last August and repeated it six months later. Is the seven-year bull market coming to an end? Time will tell – it always does.

Rewind to seven years ago and we can find a few similar-ities. At that point in time, the US stock market (S&P 500)

traded in range between 1,250 and 1,555 for nearly two years before sellers took the index down in the third quarter of 2008.

During the period of consolidation between late 2006 and early 2008, the fundamentals of the US economy were consistent with expansion or at least positive growth. According to the Bureau of Labor Statistics, the US unemployment level in December 2007 was 5.0%. At the same time, equity prices peaked in October 2007. The US economy continued to grow through the second quarter of 2008 and in March 2008, commodities – particularly WTI crude – spiked with the US benchmark oil variant hitting $100/barrel. Six months later, WTI approached $150/b.

Today’s environment somewhat resembles that of 2007. US equities have been locked in a trading range since the end

of 2014 with strong resistance near 2,137 and support near 1,811. Although this support level has held as buyers have stepped in, the resistance at 2,137 seems to be set in stone especially on the backdrop of the Federal Reserve’s policy tightening. Fundamentally, the world’s largest economy is also showing some signs of slowdown. According to the BLS, US GDP increased by 1.9% in 2015, compared with an increase of 2.5% during 2014. Unemployment, just as was the case in 2008, is at a historically low level at 5% and commodity prices seem to be stabilising.

S&P 500 weekly, 2006-09

Georgio Stoev, Saxo Bank Product Manager Futures and Options

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Predicting the market is impossible and is not the goal of this commentary. However, it is time to reassess our risk in the market and make the necessary adjustments. Cash, it must be remembered, is a part of an asset allocation strategy; trim down exposure to volatile stocks and don’t be afraid to be fearful. Using options strategies like protective puts and collars could also limit your exposure to the mar-ket’s volatility for little or no cost at times. We explain one such move in our portfolio strategies segment.

The Brexit and the European smorgasbord One of the biggest unknowns this year is the outcome of the British referendum set for June 23. The referendum will ask British voters whether they wish to remain part of the European Union. There are few items on the table that the UK would like to resolve, among which are certain limita-tions on free movement, assurances to its businesses and its large financial services sector, as well as keeping its dis-tance from a closer union with other EU members.

The uncertainty surrounding this ballot led to some anxiety among investors, who promptly sold British equities. The iShares MSCI UK ETF (EWU) made a low of $13.94 on Feb-ruary 11. Since then, however, shares of the tracker have recovered and pared the losses. Still, the ambient volatility and the anxiety could continue all the way to referendum day and beyond. In the event that Britain votes to leave the EU, the economic, social and political impact would be hard to measure. What markets will UK businesses target? Would the UK remain a union itself, or would divisions grow?

The latest poll by whatukthinks.org suggests a very even split among voters, with 51% wanting to remain in the EU.

Venturing out in 2016The start of a new year typically comes with some optimism, as well as energy and the desire to accomplish goals. For some of us, this could take the form of kicking an old habit like smoking, spending more time with family, starting yoga classes, or starting a business. The last initiative could be a very stressful endeavor, but you don’t have to lift yourself up by your own bootstraps – not entirely, anyway.

With markets stuck in a rut, it may be just the time to start your own business. Earlier this year, Inc. magazine pub-lished its 25 business ideas. At the top of the list were: business consultant (for those with knowledge of a specific field), blogger, and social-media expert. You can view the full list here.

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Commodity corner

By Ole Hansen, Saxo Bank Head of Commodity Strategy

After hitting a 12-year low back in January, crude oil has managed to recover strongly on a combination of verbal intervention from squeezed oil producers and emerging signs that US production has resumed its downtrend.

Global inventories remain at historic highs and in the US, a similar stockpile was only last seen during the Great De-pression some 80 years ago. Oversupplied markets remain a challenge to investors looking to get long and benefit from the expected recovery over the coming years.

The contango spread or discount between the near-month and subsequent futures has, during the past three months, been most elevated in WTI crude. As an investor in either futures or exchange-traded products, contango erodes the return on your investment.

The below chart shows the performance of WTI and Brent crude oil after taking the negative impact of futures rolls into account. While both crude oil futures currently trade up on the year, the return you as an investor would have achieved is lower. As a result of the difference in contango,

WTI crude has been under-performing Brent by around 11% so far this year.

The aforementioned devel-opments also help to ex-plain why Brent crude has been the most popular trade among money managers in the futures market during the recent recovery. The chart be-low shows how the long and short positions in WTI and Brent crude oil have changed.

First of all, it is clear that most of the price recovery has been driven by the collapse in short positions (red lines). Secondly, we also find that Brent crude has seen most of the buying, resulting in the long position reaching a new re-cord. Looking at the ratio between short and long positions, we find that for each short position currently held by large funds, others hold 10 long positions.

Ole Hansen, Saxo Bank Head of Commodity Strategy

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Crude oil will eventually have to move higher – and it will – but the path to recovery continues to be a bumpy one. As the second quarter kicks off, we conclude that a low in the oil price has been found but that renewed weakness will be seen with the recovery still months away.

The data used in the chart above have been taken from the weekly Commitment of Traders report from the US CFTC. We publish two weekly updates on Mondays where we take a closer look at money managers’ behaviour in commodi-ties and IMM currency futures.

The positions held by this group of investors are the most followed as they are most likely to have tight stops and no underlying exposure that is being hedged. This should make these positions most reactive to changes in funda-mental or technical price developments.

The reports can be accessed here.

Gold seems to be having one of the best quarters ever. Here some of the highlights that Ole provided in Saxo’s Q2 Outlook:

• Higher gold prices tend to be driven by uncertainty, fall-ing interest rates, stock market volatility, a weaker dollar, and rising inflation. Apart from the latter, all the others have been evident in recent few months and this has helped change and eventually turn sentiment more fa-vourably towards gold.

• Some $16 trillion of developed sovereign debt currently yields 1% or less (Bloomberg). This move towards ever lower or even negative rates is probably one of the ma-jor reasons why gold has returned to investors’ portfo-lios. Central banks, potentially apart from the Federal Open Market Committee, will continue to support a low rate regime and with this in mind, gold investors are dig-ging in for the long haul.

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Product test drive

Here are some Saxo products and features you may wish to look into so as to better take advantage of these insights.

• Options for volatility traders expand with VIX Weekly. To learn more click here

• Inter-market futures spreads now available on the Saxo Bank platform

Portfolio strategies

By Patrice Henault, Saxo Bank Head of Futures and Options

An investor might be concerned that the current investment climate could become unfavourable for equities in general. He believes he holds a good, long-term mix of European equities and instead of selling his portfolio, he could tem-porarily hedge the downside by buying a put option on the Eurostoxx50 index.

If his prediction fails to materialise and his stocks move higher, he will maintain the full upside minus the cost of buying downside protection through a put option.In this instance, we would say the investor has a diversified stock portfolio worth EUR 100,000.

This portfolio could be hedged by buying put options on the Eurostoxx50 Index. To avoid paying too high a premium, the investor could choose a strike price that is at the money or slightly out of the money.

With the underlying index at 3,027.87, the premium for slightly out of the money April (29 days to expiry) 2,975 Put is €55.50/contract or €550 given the €10 lot size.The number of Puts to be bought is calculated as follows:

Portfolio=

100 000= 3.36

Strike price X multiplier 2975 X 10

Hedging a perfectly diversified Eurozone portfolio worth € 100,000 by buying 4 April14 Put options with strike prices of 2,975 thus costs €2,220 (€55.50 X €10 lot size X 4 Puts).

Unlike selling futures, buying put options allows the hedger to profit from any rise in the index.

What happens if the price falls?

If the value of the index at expiry is 2,550 (minus 15%), exercising the put options bought 29 days earlier pro-vides a gross gain of €17,000 (2975 minus 2550) X 4 (num-ber of contracts) X EUR 10 (multiplier). By using options the inves-tor would have to hedge his overall loss on his stock portfo-lio of €15,000 as he is making a net profit of:

Strike Price - Cash Price - Premium Paid2975 - 2550 – 55.50

369.5 or for 4 puts: 369,5* € 10 * 4 Put= € 14,780.

Overall the investor is losing (15,000 minus 14,780) = €220 or 0.22% of the value of this stock portfolio of €100,000 as opposed to a loss of 15% without the protection of the Put.

What if the price rises?

If, on the other hand, the index closes at 3,300 (plus 10%) in 29 days, the options are not exercised and the portfolio is worth €110,000 (€100,000 plus 1%) less the premium paid for the options (€2,220).

Patrice Henault, Saxo Bank Head of Futures and Options

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