GS Weekly Options Watch - May 11th

May 11, 2011

United States

Weekly Options Watch Options Research

Trades: JOYG, AAPL, VRTX, UTHR Trade Recommendations Summary (2) One Page of WOW! Introducing our new one page brief summary of all of our ideas with upcoming catalysts (3) Options Insight: Government exposure back in the spotlight (4) Detailed Trade ideas: JOYG, AAPL, VRTX, UTHR (5-8) Additional Add Trade Recommendations: ARUN, DELL, ERIC, GPS, JWN, NIHD (2) The Weekly Options Watch Chartbook published today includes our Correlation, Skew, Term Structure and Sector Implied

Moves screens as well as most notable moves in the options market on the week.

Options Insight: Government exposure back in the spotlight

August puts are attractive on several stocks with high government

exposure as momentum behind deficit reduction builds. We highlight nine

stocks with an average of 69% of sales coming from government sources,

but each has implied volatility below median levels over the past year. LLL,

LMT, NOC, DELL, RTN, UNH, XRX, HUM, and GD.

Trades: JOYG, AAPL, VRTX, UTHR

Trade 1: Buy calls on JOYG; Expecting a significantly better quarter.

We’d buy attractive calls to express a bullish view ahead of the quarter.

Our analyst is significantly above the Street; sees strong M&A potential.

Trade 2: Buy Apple June Vol for June 6th Dev. Conf., a catalyst more

stock moving than earnings. Apple shares tend to be even more volatile

around the Developer’s Conference than earnings. Our analyst sees this as

an important positive catalyst for shares and expects the company to

discuss their cloud offering, a critical driver of the longer term outlook for

the company. Implied vol of 21% is near all time lows and not pricing in

this average +/-5.4% moving event, in our view.

Trade 3: Buy VRTX July Calls: 3 Important Catalyst, M&A potential.

Expecting upcoming Merck Boceprevir data, better than expected cystic

fibrosis treatment data, and TVR data on May 23 to drive substantial upside

in shares. Following data, our analyst sees high potential for M&A.

Trade 4: Buy UTHR Aug $75 Calls for FREEDOM data in June; Close

Jan-12 $90 Call Sale. Our analyst has high conviction in FREEDOM data in

June. We would use gains on the call sale to add to long August $75 calls

ahead of this key data. Our analyst sees a strong potential for M&A.

Trade Update: Close 1 trade at gain (UTHR) and 1 trade at loss (PCLN); 1

trade was previously closed at gain (CMCSA).

Katherine Fogertey

(212) 902-6473 [email protected] Goldman Sachs & Co.

John Marshall

(212) 902-6848 [email protected] Goldman Sachs & Co.

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.

The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research

Trade recommendations summary

We recommend adding to 10 positions, continuing to hold 6 positions, and closing 2

positions this week. 1 trade was closed on 4-May. The table below focuses on the catalyst-

based recommendations discussed in the WOW; for our macro and thematic

recommendations please refer to our other Cross-Product reports on our portal.

Exhibit 1: Trade recommendations summary Recommendations and indicative prices as of 10-May

Source: Goldman Sachs Global Research estimates, Bloomberg.

Stock Trade Description Initiation date Stock Trade Stock Trade

Add to these trade recommendationsAAPL BUY JUN-11 $350 STRADDLE 11-May-11 349.45 19.40 349.45 19.40ARUN BUY JUL-11 $33 CALL / SELL JAN-12 $40 CALL 24-Mar-11 31.42 0.30 32.71 -0.30DELL BUY JUN-11 $15/$16 1X2 PUT SPREAD 4-May-11 15.80 0.06 16.41 0.02ERIC BUY JUL-11 $15 CALL 4-May-11 14.98 0.75 15.38 0.95GPS BUY JUN-11 $23 PUT 4-May-11 22.93 0.95 22.98 0.87JOYG BUY JUN-11 $95 CALL 11-May-11 92.80 3.55 92.80 3.55JWN BUY JUN-11 $49 CALL 4-May-11 48.10 1.45 48.26 1.36NIHD BUY JUN-11 $41 CALL 2-Mar-11 39.65 2.67 44.06 3.80UTHR BUY AUG-11 $75 CALL 9-Mar-11 68.69 8.39 66.69 4.50VRTX BUY JUL-11 $55 CALL 9-May-11 54.54 3.90 57.05 5.70

Continue to hold these trade recommendationsAMT BUY JAN-12 $50 CALL 16-Mar-11 50.02 5.30 53.69 7.00BAC SELL JAN-13 $12.5/$25 STRANGLE 11-Feb-11 14.49 2.35 12.28 2.25DIS SELL OCT-11 $45 COVERED CALL 27-Apr-11 42.33 1.54 43.91 2.14JPM SELL JAN-13 $40/$60 STRANGLE 11-Feb-11 45.53 6.38 45.16 5.89NOK BUY MAY-11 $8/$9 STRANGLE 6-Apr-11 8.77 0.55 8.74 0.14VMC BUY MAY-11 $36/$41 PUT SPREAD 9-Mar-11 44.00 1.25 41.76 0.60

Close these tradesPCLN BUY JUN-11 $525/$590 1X2 CALL SPREAD 20-Apr-11 525.53 16.05 528.50 14.60UTHR SELL JAN-12 $90 CALL 9-Mar-11 68.69 5.80 66.69 4.60

Previously Closed TradesCMCSA BUY JUN-11 $25 CALL 20-Apr-11 24.29 0.62 26.22 1.61

Full trade idea references with risks: Legend:GPS, ERIC, PCLN, JWN, DIS, NIHD, DELL trade ideas (3-May)https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10965563&fn=/document.pdfCMCSA trade closing (4-May)https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10970005&fn=/document.pdfNIHD, AMT trade ideas (26-April)https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10919110&fn=/document.pdfNOK trade idea (6-April)https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10808751&fn=/document.pdfUTHR trade idea (9-Mar)https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10647114&fn=/document.pdfBAC, JPM trade ideas (11-Feb)

https://360.gs.com/gs/portal/?st=1&action=action.binary&d=10494465&fn=/document.pdf

Close these trades: With this report, we close our recommendations on these trade ideas for one of the following reasons: (1) the major catalysts have passed, (2) the fundamental thesis has changed, or (3) the trade has already moved to where we thought it should.

Add to these trade recommendations: These are open trade ideas where we think there remains a good opportunity for investors to add new money. We believe the trade is still attractive, the majority of the catalysts have not yet happened and there is still a significant portion of the time to expiration.Continue to hold these trade recommendations: These are open trade ideas where we think the risk/reward on the trade is still favorable; we recommend that investors who hold the position continue to do so. We would not recommend adding new money for one of the following reasons: (1) many of the key catalysts have passed, (2) the trade has moved significantly toward the place we expected it to move to, or (3) there is not enough time

Initial price Current price

Exhibit 1: One Page of WOW! Brief overview of our trade recommendations with upcoming catalysts .

Source: Goldman Sachs Research estimates; pricing as of May 9, 2011. * Option vol for applicable term. For 22mth options, we compare to 24 month realized vol. For all other terms, where applicable, we compare to recent realized for the same term as implied.

Brief Summary of Trade Thesis

Catalyst Stock Option Imp. 8Q Med. Imp. Real. For more details on our trade ideas and risks, please reference Exhibit 1.

NIHD BUY JUN-11 $41 CALL Analyst Meeting $44.06 $3.80 9% 5% 31 23 Buy calls ahead of Analyst Day -- our analyst expects management to discuss a software patch that will enable NIHD to offer 3G services. Implied vol of 32% is not pricing in a strong move in our view.

ERIC BUY JUL-11 $15 CALL Analyst Meeting $15.38 $0.95 n/a n/a 26 28 With implied volatility lower post earnings ahead of a potential stock moving catalyst (Analyst Meetings on May 12), we view calls as attractive stock replacement to equity positions, especially considering our analyst's longer term concerns, including peaking gross margins and business mix. Implied vol is near 1 yr lows.

JWN BUY JUN-11 $49 CALL Earnings $48.26 $1.36 5% 3% 30 17 Our analyst sees upside risk to estimates for the quarter and FY2011. JWN is benefiting from a healthy consumer who is less affected by rising gas prices. Department stores are better positioned to get more favorable pricing from vendors, helping to offset cost inflation.

DELL BUY JUN-11 $16/$15 1X2 PUT SPREAD

Earnings $16.41 $0.02 8% 4% 36 28 Options are implying a +/- 8% move on earnings vs median 8 qtr move of +/-4%. With most of the supply chain already reporting, our analyst does not see a significant surprise for DELL. Importantly, while tablets are a risk to shares, DELL's heavy enterprise exposure could mitigate the near term impact. Additionally, DELL is developing its own tablet offering geared to the enterprise. Breakeven: $14.06 to $16.06 on expiration.

ARUN BUY JUL-11 $33 CALL SELL JAN-12 $40 CALL

Earnings $32.71 $2.90 10% 11% n/a n/a Key beneficiary of enterprise tablet adoption. Analyst sees 18% upside to shares.

GPS BUY JUN-11 $23 PUT Earnings $22.98 $0.87 4% 2% 30 21 Our analyst sees downside risks to earnings given (1) exposure to lower end consumer makes passing on cost inflation more difficult; (2) tough comps from Old Navy; (3) near peak gross margins; (4) balance sheet restructuring.

VRTX BUY JUL-11 $55 CALL Boceprevir Data (this week) / CF Data / May 23

TVR Data

$57.05 $5.70 n/a n/a 41 50 Our analyst is positive on VRTX ahead of three catalysts, including the all important May 23, 2011 TVR study data. He sees VRTX as a compelling M&A candidate following approval for this important drug, where he is more positive on both the label and the pricing potential for the drug. Implied vol of 41% is 89 points below recent realized in the name.

JOYG BUY JUN-11 $95 CALL Earnings $92.80 $3.55 5% 4% 39 38 Our analyst is expecting a significantly better quarter for Buy rated JOYG, supported by improving seasonality, stronger than expected supply / demand dynamics evidenced by BUCY results this quarter, a bullish view on mining capex budgets, and a longer term bullish stance on M&A potential. Options are implying a +/-5% move on earnings, inline with average. Our analyst has 30% upside to 12-mth price target of $120.

AAPL BUY JUN-11 $350 STRADDLE

Earnings $349.45 $19.40 5% 3% 22 17 Implied volatility of June options appears too low to us, trading close to all time lows, considering that Apple shares have averaged a 5 day move of -5.4% on their Worldwide Developers Conference, more than the average move on earnings of +/-3%. Our analyst sees 35% upside to CL-Buy rated shares and is bullish on near term catalysts.

Volatility from Option Trade

IdeaTrade

Current Price of Trade

Recommendation

Imp. Move on Earnings from 1-

mth Options

Thursday, May 12, 2011

Tuesday, May 17, 2011

Thursday, June 02, 2011

Monday, June 06, 2011

Thursday, May 19, 2011

Options Insight: Hedge stocks with government spending exposure

August puts are attractive on several stocks with high government exposure as

momentum behind deficit reduction builds. We highlight nine stocks with an average of

69% of sales coming from government sources, but each has implied volatility below

median levels over the past year. LLL, LMT, NOC, DELL, RTN, UNH, XRX, HUM, and GD.

Government spending reductions have already impacted company results. Over the

past six months, CSC, CSCO, UIS, LLL, IBM and several other companies have noted the

negative impact of government spending reductions on their results or orders. We see the

potential for more anecdotal evidence to emerge.

Deficit reduction momentum likely to continue: Our Washington, D.C. analyst Alec

Philips and our Economics Research team note that the growing momentum behind deficit

reduction implies the possibility of greater spending cuts and/or tax expirations than they

are currently assuming. In light of the upcoming catalysts, they expect investors to

continue to focus on the impact of deficit reduction:

This week: President is expected to meet with Senate Democrats and Republicans. The

House is expected to set top-line appropriations for FY2012.

Week of May 16: The debt limit is reached and the Treasury will likely begin accounting

maneuvers to avoid increased borrowing. Senator Conrad may release a budget

resolution draft.

August 2: Our economists expect the treasury to exhaust accounting strategies.

August: The Congressional budget office is scheduled to release an updated budget

outlook.

Exhibit 2: Buy puts to hedge stocks with high government exposure, low implied vol and low put skew Government exposure is greater than 25%, Analyst Neutral or Sell Rated, 3-mth implied volatility and normalized skew is below

50th percentile over past year

Source: Goldman Sachs Research estimates.

Options prices on stocks with high government sales exposure are in-line with the

average stock in the S&P 500, despite higher fundamental risk. 3 month implied

volatility for the nine stocks we highlight is 25%, in-line with the average stock in the S&P

500. Despite the increased focus on potential decreases in government spending, implied

volatility has traded in-line with the average stock over the past several months. We favor

buying puts on these stocks now, while implied volatility is in its 18th percentile on average.

We believe that buying puts on these stocks is also attractive for investors looking to hedge

government exposure risk in their portfolio. We see the potential for correlation between

Upside YTD 52 Next 3-mth Option Stats 3-month% Sales Analyst Stock to 12m Price Week Earnings Imp. Imp - Norm. 5% OTM

Sector to Gov't Rating Price Target % Low Date Vol %-ile Real %-ile Skew %-ile put costDELL Hardware 27% S $16.19 (32%) 19% $11.34 17-May 32 40% (2) 22% 0.10 4% 4%LLL Industrials 91% S $83.22 (16%) 18% $66.11 26-Jul 21 6% 4 74% 0.16 17% 3%NOC Industrials 90% S $64.81 (14%) 10% $48.53 29-Jul 22 14% 5 80% 0.11 0% 3%LMT Industrials 97% S $79.93 (12%) 14% $67.68 26-Jul 19 11% 3 47% 0.15 27% 2%RTN Industrials 88% N $49.51 (11%) 7% $42.65 29-Jul 21 13% 4 83% 0.13 9% 3%GD Industrials 80% N $74.57 3% 5% $55.46 28-Jul 22 15% 1 43% 0.19 23% 3%XRX Hardware 30% N $10.18 8% (12%) $7.67 28-Jul 30 28% 6 83% 0.13 21% 4%HUM Healthcare 81% N $77.09 9% 41% $43.17 1-Aug 28 16% 4 20% 0.12 11% 4%UNH Healthcare 36% N $50.47 13% 40% $27.13 19-Jul 26 20% 3 19% 0.16 41% 3%

average 69% (6%) 25 18% 52% 17% 3%

May 11, 2011 United States

Goldman Sachs Global Economics, Commodities and Strategy Research 5

these stocks to rise off low levels as government spending risk comes into focus. Basket

option buyers benefit from a rise in correlation.

Exhibit 3: Options prices on gov’t exposed stocks are no more expensive than average

3 month implied volatility for our basket of 10 stocks; S&P 500 average stock implied vol

Source: Goldman Sachs Research estimates.

Puts on defense stocks are particularly attractive (LLL, LMT, NOC)

ahead of catalysts

Goldman Sachs aerospace and defense analyst Noah Poponak sees headwinds to defense

stocks and recommends that investors sell shares. He believes the assignment of Leon

Panetta to be the next Secretary of Defense, replacing Robert Gates, and Army General

David Petraeus becoming Director of the CIA (pending Senate approval) could have

negative implications for defense stocks. He sees these two appointments as likely to

curtail spending and focus heavily on expense control. He sees this as one more example

of pressure on Department of Defense spending, which he sees lasting for an extended

period of time given long spending cycles. Further, he sees valuation as rich taking into

account downward revisions to the FY2012 plan. Three month puts capture continued

budget catalysts and earnings.

22

24

26

28

30

32

34

36

38

40

8-May 8-Aug 8-Nov 8-Feb 8-May

3 m

on

th i

mp

lied

vo

lati

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Average stock vol

Government exposure stock vol



Trade 1: Buy calls on JOYG; Expecting a significantly better quarter

Buy June $95 calls for $3.55 (3.8% of stock, $92.80) ahead of earnings 2-June and

M&A potential. Goldman Sachs Machinery analyst Jerry Revich sees 29% upside to his

12-mth price target of $120 on Buy rated shares, and sees 13% upside to consensus

2QFY2011 estimate of $1.35 driven by sharply higher aftermarket demand and operating

leverage. For next quarter, he expects JOYG to report $1.63, nearly 14% above the Street’s

$1.43 estimate. Key reasons why he is bullish:

• Strong read-across from competitor BUCY’s results: JOYG’s largest competitor,

BUCY, reported 20% sales growth in underground mining and around 10% organic

growth in Surface driven by rising parts consumption on recently installed

machines. Our analyst notes that new equipment orders were also strong, with a

very robust 1.9X book to bill. He sees this as a positive data point for industry

demand and supporting his 17% above Street estimates for JOYG (2012E $7.55

EPS vs Street $6.46) and his thesis that seasonality is improving for the mining

equipment stocks.

• Industry Supply/Demand Dynamics Work in JOYG’s Favor: Tight mine supply

constraints will drive mining costs and aftermarket sales meaningfully higher over

the course of this cycle.

• Mining capex budgets still too low: Consensus views of a meaningful slowdown

in mining capex later in this cycle will continue to be revised higher.

Options are not pricing in strong fundamental trends for JOYG, or M&A potential.

With three month implied vol at 39%, only 5% from one year lows, we recommend that

investors buy options ahead of earnings. We recommend June options over longer dated

options given a surprisingly flat to upward sloping term structure, in sharp contrast to our

analyst’s strong views around the potential for M&A. In fact, he incorporates a 30%

probability of M&A in his 12-month price target (M&A Value $136) and sees CAT’s recent

bid for BUCY as a strong leading indicator that JOYG too will be acquired. One month

normalized skew is moderate, suggesting a more balanced relationship between put and

call demand. Investors who buy call options risk loss of the entire premium paid if the

underlying security finishes below the strike price at expiration.

Trade 2: Buy Apple June Vol for June 6 Dev. Conf., a catalyst more

stock moving than earnings

Buy June $350 straddles for $19.40 (5.5%, stock at $349.45) ahead of June 6

Developer’s Conference; vol near all-time lows yet shares move more on this event

than on earnings. Our Hardware Analyst Bill Shope rates Apple shares CL-Buy and sees

35% upside to his 12-month price target of $470. Apple shares are now trading at just 11X

his 2012 EPS, a 50% discount to the average multiple of 22X, despite 22% growth in 2012,

largely due to concerns around supply chain disruptions. We view implied volatility in June

options as attractive, at just 21% which is near all time lows and a reasonable 4 points over

recent realized, ahead of the June 6 Developer’s Conference.

June 6: Developers Conference is likely to be an important catalyst for shares, even

more than earnings. Our analyst expects Apple to focus on Apple’s upcoming cloud

services, which should further propel the company’s iOS platform ahead of the leading

tablet and smartphone competition. He views this as an important positive catalyst for the

stock and to further solidify Apple’s lasting competitive advantage versus smartphone

peers. While our analyst is positive on this catalyst, we note that in each of the seven years,



Apple shares have traded lower the five days around the WorldWide Developer’s

Conference (average move -5.4%). To put this in comparison, the average move of Apple

shares on earnings over the past eight quarters has only been +/-3%.

Our analyst believes that supply chain hiccups generally offer the best opportunities

for Apple’s stock, and he sees this time with iPhone and iPad as no different. The

iPhone refresh now is being pushed out to September (which is actually a positive for June

sales versus expectations), and the iPad2 sales last quarter were below expectations given

tight supplies. Importantly for these two products, he doesn’t see the delay in the iPhone

refresh as impacting sales given it will be ready for the all important December selling

season. Our analyst views Apple as the best positioned company to handle supply chain

disruptions given their large size and importance in the marketplace.

We’d buy inexpensive Apple options ahead of the Developers Conference. One month

implied volatility of 22% is trading near historical low of 20% (going back to 1996) and

versus recent realized of 18%. While options are trading 4 points over realized, typically

rich for Apple, we see average move of -5% around the Developer’s Conference, combined

with our analyst’s strong upside view on shares, as a key catalyst to buy vol, given the

average daily move of shares +/-1.1%. If held to expiration, June $350 straddle buyers profit

if shares close up 5.7% to $369.40 or down 5.4% to $330.60 on June expiration. Investors

who hold straddles to expiry risk losing their entire premium paid.

Trade 3: Buy VRTX July Calls: 3 Important Catalyst, M&A potential

Buy July $55 calls for $5.70 (10% of stock, $57.05) ahead of three key drug catalysts

and M&A potential. Goldman Sachs SMid Cap Biotechnology Analyst Terence Flynn

expects three upcoming catalysts to be positive for Buy-rated VRTX. Following the

upcoming May 23 approval date for VRTX’s key drug, TVR, he believes VRTX may become

a more attractive M&A value of $87.

This week: Approval of Merck’s Boceprevir (and pricing decision) should be

stock moving for VRTX. MRK’s competitor drug Boceprevir could be approved

first and set the pricing bar. While he is positive on the potential for both drugs, he

recommends adding to VRTX positions in the event of any weakness.

This month: “Significant” upside potential to shares from CF combo data;

market opportunity could be double vs low expectations. While TVR for hepC

is the major driver of VRTX, our analyst is bullish on the potential for the

company’s emerging cystic fibrosis (CF) drug pipeline. He expects VRTX to report

interim data this quarter (he expects May) from a Phase 2 CF trial of VX-770 in

combo with VX-770 (less than $500 mn). While this is not central to his bullish

view on VRTX shares, he sees the CF pipeline (treatment opportunity) as

underappreciated by investors, especially given low expectations for success.

May 23: TVR approval date – Broader label, higher pricing, expecting positive

catalyst for shares. Our analyst expects TVR to have a broader label than MRK’s

Boceprevir and he is above consensus for TVR pricing at $45k/yr.

Buy options as these three significant catalysts to drive should drive realized

volatility, and shares, higher. We recommend that investors buy the July $55 calls for

$5.70 (10% of stock, $57.05). Three month implied vol of 41% is 9 points below realized,

and in line with its 1-yr median. We view options as attractive in light of significant stock

moving catalysts. We would buy July options instead of June given a downward sloping

term structure, opportunity to capture more catalysts, potential risk of key catalysts



slipping, and M&A potential. Investors who buy call options risk loss of the entire premium

paid if the underlying security finishes below the strike price at expiration.

Trade 4: Buy UTHR Aug $75 Calls for FREEDOM data in June; Close

Jan-12 $90 Call Sale

Buy UTHR Aug $75 Calls for $4.50 (6.7%, stock $66.69) ahead of June FREEDOM data

and close the Jan-12 $90 call sale at a gain. On March 9, we recommended that investors

buy the August $75 call for $8.39 (stock $68.69), and sell the Jan-12 $90 call for $5.80 to

help fund the purchase ahead of several key catalysts, including earnings and June data on

FREEDOM, the biotech’s main drug to treat Pulmonary Arterial Hypertension (PAH). As we

get closer to the critical June date, we recommend that investors close the Jan-12 call sale

at a gain (ask $4.60) and add to August $75 calls, to increase upside potential into the event.

Our SMid Cap biotechnology analyst Terence Flynn rates UTHR shares Buy and sees 23%

upside to his $82 12-month price target.

Mid-June Phase 3 trial data is a critical PAH catalyst. Key upcoming catalysts center

around Phase 3 trial trail results for FREEDOM-M in June and FREEDOM-C2 in September.

These trials are studying FREEDOM as the new oral formulation of the company’s franchise

drug Remodulin for PAH. Our analyst is more optimistic than the Street that this drug will

succeed in Phase 3 and expects positive data from the first trial in mid-2011 in June. He

expects that the approval of oral Remodulin would move this drug class upstream to

first/second line patients (a $1bn+ market opportunity) and drive long-term growth; he

continues to model 2015 sales of oral Remodulin of $400mn vs. consensus of $0-$200mn.

Our analyst is more optimistic than the market that oral Remodulin will succeed in

Phase 3 and assigns a 75% probability of success to the FREEDOM trials. (1) While the

initial Phase 3 trial of oral Remodulin (FREEDOM-C, released in 2008) did not meet the

primary endpoint, he believes the trial demonstrated that the drug has activity, based on a

subset analysis of the data. (2) He notes that the new titration schedule of oral Remodulin

appears to be having a positive impact on tolerability in the ongoing FREEDOM-M and

FREEDOM-C2 Phase 3 trials, based on blinded discontinuation rates from the trials. (3)

Dose titration has been used successfully for prostanoid drugs (Remodulin, Flolan and

Beraprost). (4) The monotherapy design of FREEDOM-M (the first Phase 3 trial that will

read out) represents a low hurdle to demonstrate a benefit.

Options are not pricing in nearly enough volatility, in our view, for June – September

timeframe, and are not reflecting M&A potential. We’d expect implied volatility to move

higher for Aug options given the importance of this catalyst. In fact, we’ve recently seen

biotech options trade at much more significant premiums ahead of this type of catalyst. 3m

implied vol of 54% is elevated versus 3-mth realized of 20% but likely to stay bid, in our

view, until this important catalyst passes. Investors who buy call options risk loss of the

entire premium paid if the underlying security finishes below the strike price at expiration.

Readers please note, we are now including the screens typically found in the back of our Weekly Options Watch in The Weekly Options Watch Chartbook, also published today.

Rating and pricing information

Apple Inc. (B/N, $349.45), Joy Global Inc. (B/N, $92.80), United Therapeutics Corporation

(B/N, $66.69) and Vertex Pharmaceuticals, Inc. (B/N, $57.05).



Reg AC

We, Katherine Fogertey and John Marshall, hereby certify that all of the views expressed in this report accurately reflect our personal views about the

subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly,

related to the specific recommendations or views expressed in this report.

Disclosures

Option Specific Disclosures

Price target methodology: Please refer to the analyst’s previously published research for methodology and risks associated with equity price

targets.

Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market levels.

All prices and levels exclude transaction costs unless otherwise stated.

Buying Options - Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) the

strike price at expiration. Investors who buy call or put spreads also risk a maximum loss of the premium paid. The maximum gain on a long call or

put spread is the difference between the strike prices, less the premium paid.

Selling Options - Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors who

sell covered calls (sell calls while owning the underlying security) risk having to deliver the underlying security or pay the difference between the

security price and the strike price, depending on whether the option is settled by physical delivery or cash-settled. Investors who sell puts risk loss of

the strike price less the premium received for selling the put. Investors who sell put or call spreads risk a maximum loss of the difference between

the strikes less the premium received, while their maximum gain is the premium received.

For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the

settlement price on expiry.

Company-specific regulatory disclosures

The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies

covered by the Global Investment Research Division of Goldman Sachs and referred to in this research.

Goldman Sachs has received compensation for investment banking services in the past 12 months: Apple Inc. ($349.45)

Goldman Sachs expects to receive or intends to seek compensation for investment banking services in the next 3 months: Apple Inc. ($349.45), Joy

Global Inc. ($92.80) and Vertex Pharmaceuticals, Inc. ($57.05)

Goldman Sachs has received compensation for non-investment banking services during the past 12 months: Apple Inc. ($349.45)

Goldman Sachs had an investment banking services client relationship during the past 12 months with: Apple Inc. ($349.45), Joy Global Inc. ($92.80)

and Vertex Pharmaceuticals, Inc. ($57.05)

Goldman Sachs had a non-investment banking securities-related services client relationship during the past 12 months with: Apple Inc. ($349.45)

Goldman Sachs had a non-securities services client relationship during the past 12 months with: Apple Inc. ($349.45)

Goldman Sachs makes a market in the securities or derivatives thereof: Apple Inc. ($349.45), Joy Global Inc. ($92.80), United Therapeutics

Corporation ($66.69) and Vertex Pharmaceuticals, Inc. ($57.05)

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opposite side of orders executed on the relevant exchange: Apple Inc. ($349.45), United Therapeutics Corporation ($66.69) and Vertex

Pharmaceuticals, Inc. ($57.05)

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