mar 08 2010 sap

Stock Analyst Program 2010

Driss [email protected]

Jamie [email protected] in Investment Management, Wharton Exchange Fall 2009

March 8, 2010

Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet) We will start with introductory material and finish with an open discussion


Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 8 Options, ETFs, and Forex Demonstration

Feb 5 What is Price Action?Multiples Analysis

Mar 12 Accounting 101

Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 Cancelled

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Agenda

Research Report Overview

Options

ETFs

Live Forex Demonstration

How To Start…

Next Topic Discussion (Accounting)


Research Report Overview

Research Report Composition The key to writing a coherent SAP research report is understanding and articulating an investment time horizon

- Refer to previous reports on the MIC website: Resources > SAP References


Evaluation Criteria (1)

1. Choice of industry articulated relative to other industries that would be affected by the general economy in a similar way. For example, the drug delivery industry and the drug manufacturing industry are affected by the same external economic conditions; thus it should be clear as to why one versus the other.

2. This would include use of ratios specific to industry, dcf valuation, comps, precedents, etc... This would also include quantifiable identification of relevant catalysts and earnings growth potential specific to the company.

Research Report Evaluation

Industry Analysis 30% Presentation/Research Paper 10%Identification of key metrics and ratios /10% Organization /3.3%Identification of key trends /10% Flow /3.3%Choice and rationale for industry (1) /10% Content /3.3%

Stock Analysis 40% Technical Analysis 20%

Quality of valuation & depth of research (2) /20% Clear investment horizon /5%Investment rationale /20% Entry & exit strategies /15%

Total 100%


Options

Options

Payoff Basics

•Gives its owner the right (not obligation) to buy (call option – bullish on the stock) or sell (put option – bearish on the stock) an asset (the underlying)

• At a specified price (the strike price)• On (and perhaps before) a given date (the expiration date)• Is affected by the underlying stock’s price, it’s historical and perceived volatility, time to expiration, interest rates• Is traded in lots of 100 – 1 option contract is at the scale of 100 shares


Options

Lingo Basics

• The price of an option is defined primarily by the price of the stock (the underlying)

• In most liquid stocks, options are traded for every month up to 2 years

• The two parties involved in a on option transaction: writer (seller) and the buyer of the option. An option isn’t issued, it is just created when one party wants to write one and finds another party to buy it or vice versa. The buyer transfers cash (the option price) to the writer who keeps the cash and bears the risk of having to pay the buyer a premium at expiration if the stock price closes above the strike (call) or below it (put)


•Option premium = time & implied volatility value

•Intrinsic value + time value = option price

• Long (buying an option), short (selling an option

• Covered – write an option but own the stock at the same time vs. Naked – write an option without owning the stock so you need cash as collateral in case the trade goes bad

• Credit – the option combination will yield a net credit to your account ie the options you are writing are worth more than the ones you are buying

• Debit – opposite of the above

•Option expiration – 3rd Friday of each month

Options

Factors Usefulness

• Options provide:• A hedging tool to protect net gains/losses when owning the underlying• Leverage to make high returns from small stock price moves

• Take a flexible position on a stock through option combinations

• Combining long/short calls/puts can create positions which will be profitable if the stock price stays within in a range, if volatility increases or decreases, if there is a sharp move of the stock either way...


Call Put

Stock Price ↑ ↓

Strike Price ↓ ↑

Time to Expiration ↑ ↑

Implied Volatility ↑ ↑

Risk Free Rate ↓ ↑

Dividends ↓ ↑

OptionsStock Analyst Program 2010

Options Chain

Options

Combinations Strategies


• There are dozens of combinations and each is suitable for unique situations – bullish/bearish market, stagnant market, extremely volatile market...

• Combinations are costly to implement with small accounts because of fees so are used in larger positions

• Example: before a major event (ie earnings announcement) a short butterfly or short call/put ladder position can be implemented because you are betting on a high deviation from market expectations of the company’s performance

• You don’t have to hold an option till expiration - you can use it as short term leverage for directional trading – instead of getting 3 times margin from a broker an option can provide you with 20 times margin. This is very risky and is not exactly the same as normal leverage because when you are long an option, everything else remaining equal, you will lose value every day because of time value erosion

• Option writers have profitable trades much more often than option buyers

• A combination can have several different options embedded so you can scale in or scale out as the stock evolves over time and add/remove legs over time as well

Exchange Traded Funds

What? Types of Canadian ETFs


• Open-ended index tracking fund

• Managed by asset managers

• Bought and sold through brokers

• Trade on the exchange like any other stock

• Can go long or short

• Lendable & Marginable

• Transparent underlying portfolios available daily

• Real Time indicative NAV


• Index ETFs

• Inverse & Leveraged ETFs

• Commodity ETFs

• Currency ETFs

• Actively Managed ETFs

• Exchange Traded Notes (ETNs)

Tactical Uses Strategic Uses


• Interim Beta : Maintain exposure to given market while searching for specific market opportunity• Cash Management : Able to invest cash rapidly and cost effectively to gain desired market exposures• Derivatives Alternative : Broad opportunity set of Delta 1 exposures with single line cash based settlement • Exposure Management : Easily shift portfolio emphasis by adjusting exposures (e.g. duration, credit)• Thematic : Implement thematic exposures (e.g. dividends, alternatives)

Other uses: • Transparency• Liquidity• Diversification• Cost effective (same exposure to several securities without having to individually pay fees for exposure to each)

• Market Exposure: Implement wide variety of investment strategies using a broad range of market exposures• Directional Views: Establish broad directional market position, use long & short trades to implement market view(s) • Core Satellite: Achieve strategic focus • Rebalancing: Correct drift in a portfolio’s asset allocation or style• Completion: Add uncorrelated instruments and/or asset classes to strategy

Source: Global ETF Research & Implementation Strategy Team, Barclays Global Investors



Canadian ETF Statistics


Source: TSX

• Issuers:• BMO• Claymore• Horizons AlphaPro• Horizons BetaPro• iShares

• Unique ETFs:• BMO DJIA Hedged to CAD (ZDJ)• Claymore BRIC (CBQ)• Claymore Oil Sands Sector (CLO)• Horizons AlphaPro Gartman (HAG)• iShares COMEX Gold (IGT)• S&P/TSX 60 Inverse ETF (HIX)• US Dollar Bear Plus ETF (HDD)


Prospectus


Source: www.hapetfs.com

Forex Demonstration

How to Start…

How to Start…

• Macroeconomy• David Rosenberg, Chief Economist & Strategist, Gluskin Sheff

• Go to GluskinSheff.com to sign up for morning newsletters (often bearish)• SeekingAlpha.com > The Macro View (can e-mail subscribe)• Economist.com > Business and Finance

• Industry Analysis [VPN required]• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

NetAdvantage > Industry Reports• Or, > Mergent Online > Industry Reports

• Bloomberg terminal: RSE <go> > Search by Industry• SeekingAlpha.com > Stocks & Sectors

• Company Analysis• Finviz.com > Screener• Google.com/finance > Screener• http://www.mcgill.ca/library/library-findinfo/subjects/management/industry/ >

ValueLine [old school, but great info in one page]• Bloomberg terminal: ‘ticker’ <go> > Fundamentals & Estimates > ANR

Important Resources


Friday, March 12th Session

Annual Report – Accounting 101


• We will go over NRG Energy Inc.’s 2008 Annual Report• http://phx.corporate-ir.net/phoenix.zhtml?c=121544&p=irol-irhome

• Please prepare by looking at the table of contents (know what the Annual Report contains), and by looking at the 3 financial statements (Income Statement, Balance Sheet, Statement of Cash Flows)

• This exercise will hopefully make you more comfortable with reading financial reports, and it will set the framework for a DCF analysis (which I will bring for NRG)

http://phx.corporate-ir.net/phoenix.zhtml?c=121544&p=irol-irhome

Date Topic Date Topic

Jan 29 Overview, Valuation, Resources to Start Mar 5 Options, ETFs, and Forex Demonstration

Feb 5 What is Price Action?Multiples Analysis

Mar 12 Accounting 101

Feb 12 Stock Screening & Strategy/Money Management Mar 19 TBD

Feb 19 Cancelled: Reading Week Mar 26 Cancelled

Feb 29 Cancelled: Reading Week Apr 2 Final SAP Presentations

Winter 2010 Overview Meeting every Friday at 2pm (will strive for a consistent room to meet)


mar 08 2010 sap

Business

option price

option expiration

option combinations

stock price stays

stock price closes

option premium

option transaction

option buyers