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General Meeting #39.22.2015University Securities Investment Teamtexasusit.org

9/22/2015

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• General Announcements• Market Update

• Hans Uy• Portfolio Update

• Cliffe Kim• Guest Lecture: Intro to Quantitative Finance

• Undergraduate Computational Finance• Pitch: The Traveler’s Companies (TRV)

• Dylan James• Jack Butler• Anurag Bansal

Agenda

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Next Week: USIT Career Panel

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Benedikt Kroll

Goldman SachsSales & Trading

Miguel Perez

Leerink PartnersHealthcare Investment

Banking

Manideep Ravi

JefferiesEnergy Investment

Banking

Matt Rindelaub

Point72Asset

Management

Ashley Liu

Bank of AmericaFIG Investment

Banking

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Next Week: USIT Career Panel

9/22/2015

• Submit questions for panel online at texasusit.org

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General Announcements

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• Juniors interested in investment banking • New York/Houston offices• Summer Analyst Presentation• Date: Thursday, October 8th

• Time: 7-8pm • Room: UTC 3.104

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• First TWO meetings are free!• Email vicepresident@usiteam.org for WSJ log-in

information• SCG Workshop: Time Traveling with Money • Thursday, Sept 24th – CBA 4.328, 7-8pm

General Announcements

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• Record Number of Both SCG/Board Applications

• Board: 62 Applicants, 5 Spots (8.06%)• SCG: 100 Applicants, 7 Spots (7.00%)

• McCombs BHP Freshman: 19.52%• University of Oxford: 18%• MIT: 7.9%• Princeton University: 7.4%

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SCG/Board Applications 2015

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The Sorrows of Young CliffordOriginal Plans (Circa 2011)2011: Join SCG2012: SCG Senior Analyst2013: USIT President2014: Graduate2015: Make $1 Million2016: Make $10 Million2017: Make $100 Million2018: Buy Goldman Sachs2019: Make $1000 Million2020: Buy Wall Street2021: Make $10000 Million2022: Buy Federal Reserve

New Plans2011: Join SCG (Fail)2012: Be sad, join Army2013: Fight communism2014: Become USIT Treasurer2015: Become VP2016: Overthrow Vishal (coup d’etat/cliffe d’etat)2016: Become “El Presidente”2017: Graduate2018: Make $1 Million2019: Make $10 Million2020: Make $100 Million

Analyst Groups

Senior Analyst

Director

Standard Analyst Group Format

Professional Group Format

Senior Director Senior Director

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• Emails will be sent out with Analyst Group Survey• Final SCG Thursday Workshop: Thursday, October 1st • Submit survey by Wednesday, September 30th • Analyst Group Orientation – Sunday, October 4th

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Timeline

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• Intensive workshop covering investment essentials• TOPIC: Financial Accounting

• Date: 9/27 Sunday, 11:00AM• Location:

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USIT Seminar

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• UCF Fall Workshop Series: Option Theory• Thursdays from 7-8pm, CBA 4.328• First Workshop: Thursday, October 8th

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UCF Workshops

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Market UpdateHans Uy

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• Federal funds rate has remained near 0% since the depths of the recession in 2008

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The Fed’s Interest Rate Decision

• The Federal Open Market Committee met last Thursday to discuss possibly raising the rate

• Decided to maintain the current interest rate• Foreign economic uncertainty• Recent stock market selloff• Fear that the US economic recovery is not yet complete

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Effects of the Fed’s Decision• Stock market tumbled in the days after

• Demonstrates a lack of confidence in the overarching economy

• But the Fed will likely raise rates at the next meeting in December

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S&P 500 -- 9/18/15

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Fed’s Decision – Political Humor

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Other Global News• Japan’s parliament approves allowing their self defense

forces to be deployed for combat abroad for the first time since World War 2

• Canada’s GDP contracts 2 quarters in a row (-0.8%, -0.5%). They’ve been hurt by falling oil prices

• European migrant crisis deepens with uncertain economic effects

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Business News• Anheuser-Busch approaches SABMiller about a potential

$100B merger• Uber hits more regulatory struggles in France• Volkswagen shares fall 25% • Tesla releases Model X• Nintendo delays release of

upcoming Zelda and Star Fox games until 2016

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Portfolio Update#thanksYellen Edition

9/22/2015

#thanksYellen

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USIT Portfolio Current Value: $ 11,943.685d Performance Index Comparison

(-2.68)%(-2.05)%(-2.16)%(-2.33)%

500

2000

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Name Price 5d Chg ($ · %) Mkt Value Total Chg ($ · %) 52wk Low 52wk HighAAL American Airlines 41.19 -18.85 · -3.40% 535.47 86.06 · 19.15% 28.10 56.20AAPL Apple 113.40 -60.48 · -2.48% 2381.40 923.70 · 63.30% 92.00 134.54ACC American Campus 35.10 14.80 · 4.40% 351.00 -7.30 · -2.04% 32.12 45.38AGX Argan 36.25 -84.70 · -6.26% 1268.75 509.25 · 67.05% 28.62 42.50BABA Alibaba Group 61.87 -15.10 · -4.65% 309.35 -98.35· -24.12% 58.00 120BBRY BlackBerry 7.25 --24.00 · -3.20% 725.00 -312.00 · -30.09% 6.41 12.63FNMA Fannie Mae 2.30 7.15 · 2.22% 328.90 -190.19 · -36.64% 0.01 3.51GENC Gencor 8.94 -5.64 · -1.32% 420.18 -78.96 · -15.82% 8.90 10.17GILD Gilead Sciences 106.51 -22.70 · -4.09% 532.55 19.55 · 3.81% 85.95 123.37AJRD Aerojet Rocketdyne 19.43 -93.50 · -8.78% 971.50 120.50 · 14.16% 15.11 24.35IDT IDT Corporation 15.00 4.50 · 0.40% 1125.00 -226.25 · -16.76% 14.00 23.24MUSA Murphy USA 53.96 8.55 · 1.07% 809.40 219.90 · 37.30% 47.73 73.97PTC PTC Inc. 33.63 6.30 · 1.91% 336.30 -1.80 · -0.53% 31.15 42.75RNET RigNet 28.70 10.40 · 3.76% 287.00 -167.20 · -36.81% 23.37 47.37SLCA U.S. Silica 17.57 -7.50 · -2.77% 263.55 -163.95 · -38.55% 16.49 69.61SWKH SWK Holdings 1.45 -8.00 · -1.36% 580.00 132.00 · 29.46% 1.17 4.5TRN Trinity Industries 24.29 -33.67 · -9.64% 346.45 -83.33 · -20.87% 21.78 50.14HLT Hilton Worldwide Holdings

23.68 - · -% 402.56 -35.87 · -8.18% 20.72 31.60

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Hilton Worldwide Holdings (HLT)#thanksYellen

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• California-based rocket/missile propulsion manufacturer• Helped deliver American Freedom to the following:• Orbit• The Moon• Mars• Pluto• Cold War Communists• the Taliban• al-Qaeda

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Aerojet Rocketdyne (AJRD)

Сделано в России

Gencorp Inc. (GY)• "Russia will ban the United States from

using Russian-made rocket engines for military launches” – Russian Deputy PM• “The Air Force is taking steps to

[eliminate] reliance on a foreign-made liquid rocket engine” – Pentagon Report• National Defense Reauthorization Act:

Stop using Russian engines by 2019

Competes for Department of DefenseContract

Competes for ULA Contract

Supplies Engines

Supplies Engines

$2 billion“No."

“…..."

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Guest Lecture: Intro to Quantitative FinanceUndergraduate Computational FinanceChirag Agrawal, Senior Director

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Case Study: Play on Volatility

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How We Like to Trade• Most traditional and fundamental investing styles are focused on gaps

between intrinsic or market implied valuation and current price• The trade is usually structured on taking advantage of this valuation gap,

ensuring you have a good margin of safety, and then executing• In essence, you typically make bets on directionality of the price movement

• However, we often like to think of ways to profit while staying direction-neutral• Our thesis isn’t always built on picking whether certain securities will

appreciate or depreciate in price• Exposure through derivatives allows us to act on this investing style

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Implied Volatility• Rather than make a bet on which direction a stock moves, we can

make a bet on how much it moves around instead• Implied Volatility – essentially the market-expected (annualized)

volatility over the life of the option• In essence, how much future volatility a given security is pricing in

• How does IV play into options pricing?• How would an increase in volatility affect the probability of your option going

in the money?

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Forming a Thesis Around IV• We can essentially use options to make bets on whether or not we

think the IV priced in is too high, or too low• However, there are a few considerations:• IV isn’t the only input into options pricing• Individual options contracts (puts, calls) are directional in nature• How can we think about trying to isolate effects of single variables?

• Possible Solution:• Combine individual options contracts in a way that make profitability most

sensitive to a few factors

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Case Study: Alibaba Group (NYSE: BABA)• UCF Pitch from 11/2014• BABA had recently IPO’d (9/19/14) and options started trading at the

end of September/beginning of October• Recent tech IPOs had high implied volatility when they first started

trading, but this eventually decreased as time went on• We had the thesis that IV on BABA would follow a similar pattern• We looked at their recent earnings and comparable company

performance; we also analyzed the spread to determine profitability scenarios

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Tech IV after IPO

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Average Monthly IV Change Average: 2.067Stdev: 1.674

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Thesis Continued• We essentially think BABA will follow suit of tech peers post-IPO, and

IV should continue to fall for the forseeable future• IV @ IPO: 60.515• IV @ Time of Pitch: 43.312

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Structuring our Trade• A longer-term option has higher vega • Vega = exposure to implied volatility • Less sensitive to underlying movements because its expiration is very far away

• A shorter-term option has less extrinsic value, so it depends mainly on intrinsic value, or price of the underlying• Gamma = exposure to realized (actual) volatility • Since it is more sensitive to change in underlying, it has more gamma

• So we want to try and structure a position that is market neutral, short on implied volatility, and tries to minimize effect of realized volatility

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Iron Condor• An options spread combining 4 different options (2 puts, 2 calls)• Different, OTM options with same expiration date

• Market Neutral – no bias towards bearish or bullish market• Designed to have high chance of limited profit when underlying has

low volatility• UCF Position• 1x 16Jan 70P for $2.60• 1x 16Jan 75P @ $4.00• 1x 16Jan 150C @ $12.20 • 1x 16Jan 155C for $11.60

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Payout Scenarios• We will be profitable if the underlying price of• BABA is within the range [73 < x < 152]• Maximum profit = 2.00• Maximum loss = -3.00• BABA currently trading at 119.15, must move down either -$32.85 or

up by +$46.15 to be unprofitable• That’s either -27.57% or +38.73%

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Revisiting the Position

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Revisiting the Position

UCF Enters

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Revisiting the Position• Initial thesis was that IV will drop (vega was negative on spread)• Did it happen? Yes

• However:• We had no opinion on the directionality of BABA, so we entered into a

direction-neutral position (delta ~ 0 on spread)• As BABA underlying dropped in price, delta increased (gamma was negative

on the position)• As a result, further drops in underlying lost us money (we were profitable up

to a -28% move in stock)

• Lesson Learned: Option exposure changes with a variety of factors• Always be sure to revisit your position and thesis

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Stock Pitch: The Travelers Companies (TRV)Dylan JamesJack ButlerAnurag Bansal9/22/2015

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Vote: texasusit.org/portfolioShould we add TRV to our portfolio?Voting opens after DCF Analysis

9/22/2015