ALPHA GENERATION A GUIDE FOR SMART OVERWRITING

Global Equity Flow Engineering and Strategy

FOR INSTITUTIONAL INVESTOR USE ONLY

October 1st , 2013

Delphine Leblond-Limpalaër, CFA

delphine.leblond@sgcib.com

+44 20 7762 5771

NOT FOR DISTRIBUTION IN THE US

2 25/09/2013

OVERWRITING AT A GLANCE : A LONG TERM SOURCE OF ALPHA…

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2006 2007 2008 2009 2010 2011 2012 2013

Overwriting outperformance

EuroSTOXX 50 Stocks

Source: SG Cross Asset Research, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES

TO HISTORICAL MARKET DATA.

3 25/09/2013

…THAT REDUCES THE VOLATILITY OF THE PORTFOLIO

0% 2% 4% 6% 8% 10% 12%

EuroSTOXX 50

Single Stocks

Standard deviation of performance (2006-2013)

Long + overwriting

Long only

Source: SG Cross Asset Research, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

4 25/09/2013

WHAT IS INFLUENCING OVERWRITING PERFORMANCE?

0%

1%

2%

3%

4%

5%

6%

-30% -20% -10% 0% 10% 20% 30%

% o

f o

ccu

rre

nce

monthly returns %

Distribution of the monthly returns of the STOXX600 members over the 2000-2013 period

Source: Bloomberg, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

87%

13%

5 25/09/2013

"I'd be a bum on the street with a tin cup if the markets were efficient " - Warren Buffett

WHAT IS INFLUENCING OVERWRITING PERFORMANCE?

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST

PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA

-60

-40

-20

0

20

40

60

0 10 20 30 40 50 60 70 80 90

IV –

30 d

ays l

ag

ged

RV

1M ATM Implied Volatility

EuroSTOXX 50 implied vs. realised volatility

2005

2006

2008

2007

2009

2010

2011

2012

2013

overpriced volatility

underpriced volatility

66% of positive P&L

Source : SG Cross Asset/Derivatives, SG Global Engineering and Strategy

6 25/09/2013

WHAT IS INFLUENCING OVERWRITING PERFORMANCE?

-40

-30

-20

-10

0

10

20

30

0 10 20 30 40 50 60 70 80 90

IV -

30 d

ays l

ag

ged

RV

1M ATM Implied Volatility

EuroSTOXX 50 Implied vs. realised volatility when the market is up

Source: SG Cross Asset Research/Derivatives, SG Global Engineering and Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST

PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

82% of positive P&L

overpriced volatility

underpriced volatility

7 25/09/2013

WHAT IS INFLUENCING OVERWRITING PERFORMANCE?

50% 52% 54% 56% 58% 60% 62% 64% 66% 68%

Telecommunication Services

EuroSTOXX 50

Consumer Staples

Health Care

Utilities

Financials

Consumer Discretionary

Materials

Energy

Industrials

When is implied volatility overpriced?

Source: SG Cross Asset Research, SG Global Engineering & Strategy, % of observations when lagged 1M realised IV ends below 1M ATM IV, 2005-2013, current index

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PA ST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

8 25/09/2013

AVOIDING THE TAIL RISK IN AN OVERWRITING STRATEGY

600

800

1000

1200

1400

1600

1800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RSI30 signal with a threshold at 50 vs. S&P 500

S&P 500 spot Pink (bear) blue (bull)

Source : SG Equity Derivatives Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PAST

PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO

HISTORICAL MARKET DATA.

1. Index : use a momentum indicator

9 25/09/2013

AVOIDING THE TAIL RISK IN AN OVERWRITING STRATEGY

Expensive valuation

Recent strong performance

Not in SG Event

prediction list

No major catalyst

No significant

short interest

No low/negative

skew

2. Stocks : criteria to decrease the probability of big upward movers

10 25/09/2013

THE VERY GOOD …

1.8

2.3

2.8

3.3

3.8

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

May-12 Aug-12 Nov-12 Feb-13

Call p

rice (

% s

po

t)

ENEL

1M 25% delta call price stock price

Source: VolHub, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST

PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

11 25/09/2013

… THE GOOD …

0

5

10

15

20

25

30

80

100

120

140

160

180

200

01-Sep-04 01-Sep-05 01-Sep-06 01-Sep-07 01-Sep-08 01-Sep-09 01-Sep-10 01-Sep-11 01-Sep-12

Total: invest €100 in 2004

spread Long only Overw riting

Source: SG Cross Asset Research, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PAST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

12 25/09/2013

… AND THE UGLY

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

KPN

1M 90%-110% skew Stock price (lhs)

Source: SG Cross Asset Research, SG Global Engineering & Strategy

THE VALUE OF YOUR INVESTMENT MAY FLUCTUATE. THE FIGURES RELATING TO PAST PERFORMANCES AND SIMULATED PERFORMANCES REFER TO PA ST PERIODS AND ARE NOT A RELIABLE INDICATOR OF FUTURE RESULTS. THIS ALSO APPLIES TO HISTORICAL MARKET DATA.

13 25/09/2013

STOCK VS. INDICES OVERWRITING

A matter of :

Liquidity

Strategy

Opportunity

14 25/09/2013

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from the products and result notably in the partial or total loss of the invested amount (if any).

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