Actionable trade ideas for stock market investors and traders seeking alpha by overlaying their portfolios with options, other derivatives, ETFs, and disciplined and applied Game Theory for hedge fund managers and other active fund managers worldwide. Ryan Renicker, CFA

1. U.S. Listed Options Sales Tuesday, August 04,
2009
Market Commentary
Ryan Renicker, CFA
(646) 557-7999 Performance Chasing: Relative Value
John Martin
(646) 557-7724
Z Classic “Garbage Rally”? ALERT
Stocks Having Low Altman Z Scores Leading the Charge Today
• We find that companies having relatively low Altman Z-Scores (Z-Scores < 1.80) are significantly
outperforming companies having relatively strong Altman Z-Scores (Z-Scores > 3.00).
• This is indicative of performance chasing, in our opinion.
What is Altman’s Z Score?
• In a nutshell, Altman’s Z-Score is a metric that quantifies a firm’s probability of entering bankruptcy.
• A Z-Score utilizes a variety of financial ratios reflecting a company’s liquidity, earnings power, revenue-
generating capacity and leverage (debt load).
• Companies having Z-Scores less than 1.80 generally have a relatively higher probability of experiencing
financial distress.
• On the other hand, companies having Z-Scores more than 3.00 are considered to have a relatively low
probability of bankruptcy.
Trading Opportunities – Time to Take Some Profits?
• Given the nature of today’s rally – which is consistent with classic performance-chasing behavior – consider
hedging your gains (for the very short term) by purchasing (relatively cheap) puts on the S&P 500 Index.
• Alternatively, consider instituting an equity substitution trade by switching out of cash and into calls.
• For long-only accounts, consider taking some profits (again, in the short run).
• We believe this rally is likely to stall in the near term and we anticipate a sideways market until the “Stage III”
rally takes hold this fall.
• The next major leg up for the market is likely going to occur during the next earnings season, as firms’ Q3
earnings validate improving trends in economic conditions / data and signaling an end to the current
recession (the “Stage III” rally).
• Please call to discuss additional insights on ways to structure these trades (and other ideas on the back of this
theme) tailored to fit your specific investment objectives and maximize your return/risk profit potential.
Figure 1: Average Return by Sector (“High” Z Score Companies vs. “Low” Z Score Companies
5%
4.5%
4%
3%
2% 1.9%
1.2%
1.1%
1%
0.6% 0.6%
0.3%
0.1% 0.2%
0%
0.0% -0.1%
-0.7%
-1%
Consumer Energy Health Care Industrials Information Materials
Discretionary Technology
Average Return (Altman Z Scores > 3.0) Average Return (Altman Z Scores < 1.80)
Sources: Newedge Listed Options Sales, Bloomberg.