Document Text Content
From: Ens, Amanda
Sent: 11/15/2016 2:44:06 PM
To: jeffrey E. [jeeyacation@gmail.com]; Richard Kahn
Subject: SPX put contingent on higher rates
Attachments: image001.jpg; image002.jpg; image003.jpg; image005.png
Importance: High
Navigating post-Trump volatility
• We are recording unprecedented divergences in falling equity vol with rising rates vol post Trump's win. Intra-
day S&P realized vol collapsed from near 60% to below 20% in 2d [Chart 1]
• While equities have shown less conviction over what a Trump win means (given strong sector rotation), the
bond market has sold off with one of the largest moves in history [Chart 2 & 3]
• Stabilizing rates volatility from here is key to markets remaining calm and while equity upside may continue, it is
not without higher risks
• We like cheap optionality to hedge long-equities if rates continue to move sharply
For investors long equities, we look at ways to cheapen protecting from downside risks in the event of further bond
market volatility catalysed by Trump policy uncertainty
• Buy an SPX Apr-17 95% put conditional on US 10Y CMS > 2.5% at maturity for 0.87%
O 70% discount vs. vanilla
O CMS ref. 2.11%, SPX ref. 2,164.2
CMS = constant maturity swap
Chart 1: The response in S&P 500 realized equity volatility to the US election surprise was similar to Brexit but more extreme, as the
spike in volatility collapsed at record speed
140%
=•• 120%
a, 100%
.1
80% -
a
60%
▪ 40%
5 20%
0%
20%
0%
•
•
•
• • • ••
• • 18
; . . •
•%.• • .%
• e• j is
•
•••„
• ••
US Etecbon (10. & 11-Nov vol S 9-Now fol)
Brexit (28- & 27-Jun lot vs 24-Jun %pi)
40% 60% 80% 100% 120%
SPX 1-day intrcityvol
Source: BofA Merrill Lynch Global Research. Based on daily data from June 2004 to current
140%
160%
Chart 2: Ten-year US Treasury yields see a near record spike after Chart 3: Long Bond futures prices down near record amount
the US election (-5%) in the four days since the election
HOUSE OVERSIGHT 014310
24%
19%
14%
9%
4%
I "
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cn (y)
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70 15%
60
50 10%
40
II 30 5%
20 10 0%
-5%
L.r2 :7- 0
-8 (.3 8 - •10% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016
• Largest 4-clav %changes in 10yr UST yeelcIs since 1962
Change rneasixed n bps (ngtt)
Source BofA Merrill Lynch Global Research. Based on daily data since 1962.
Amanda Ens
Director
Bank of America Merrill Lynch
Merrill Lynch, Pierce, Fenner & Smith Incorporated
One Bryant Park, 5th Floor, New York, NY 10036
The power of global connections'
Bankof America
Merrill Lynch
— 4-day rehrn of a 30fr UST futures mestrnent
14-Na -16
Source BofA Merrill Lynch Global Research
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HOUSE OVERSIGHT 014311