EFTA02343682.pdf

From: Richard Kahn Sent: Tuesday, July 26, 2016 5:20 PM To: jeffrey E. Subject: Fwd: Buy VIX options for vol replacement trades i reviewed trade idea as BAC and others on the street are =reparing for a choppy August general big picture thought =s that pain trade for short and mid term is higher - per amanda =nstitutional cash at 5.8% is highest since Nov 2001 long term there are concerns about 2017 projected =arnings Spot Vix today per Amanda was 13.00 amanda=said that you can adjust Aug 15/21 call spread to Sep 15/21 for =.00 if you =ike trade idea we can fine tune spread numbers and even do for $0 cost =s proposed below: buy Aug 17 call sell Sep 24 call please advise thank you Richard Kahn HBRK Associates Inc. 575 Lexington =venue 4th Floor New York, NY 10022 Begin forwarded message: From: =/b>"Ens, Amanda' Subject: =/b>Buy VIX options =or vol replacement trades Date: =/b>July 26, 2016 at 12:13:18 PM =DT To: qb>Richard Kahn We view buying VIX =all spreads as an attractive alternative to buying SPX or SPY put =preads. Would love to discuss in more detail if you have a few =inutes. EFTA_R1_01311972 EFTA02343682 TRADE a buy VIX Aug 15 / 21 call spread for $1.10 or buy VIX Aug 17 call, sell Sep 24 call for $0 cost (ref =5.30 and 17.50) The catalysts are =bundant enough to make the case to be long vol (Fed, BOJ, EU bank =tress test, ...) but the question is how to be long vol with the =heapest amount of premium spent. 1. Current positioning in the VIX =TPs (chart below) suggest that almost all of the $100m vega that =as sold post- Brexit has been bought back. The total amount of vega now =tands at long $180m, a very large number by any standard. Given =IX has its lowest expiry level since July 2014 last week at 11.62 and =hat the market has rallied 180pts (+9%) in a month, it does make sense =o buy some protection and be long some hedges. 2. However, the somewhat =rowded positioning in outright long VIX products is making owning vol a =ery expensive proposition over time. Last week July VIX futures had a =oll down of 1pt in just the last 24h of trading before it expired. The estimated roll down over a month is around 2.20 vol point right now, i.e. 14% of the value of the =urrent 1m VIX future. So while the direction is probably correct (long =01), the vehicle being used might not be the most efficient. A very steep term structure should be utilized in a way =hat benefits a long vol position, not goes against it. VIX calendar =all spreads are one possible answer. 3. In addition, VVIX (implied VIX vol) has risen =Opts in 10 days, reflecting increased demand for outright VIX upside =alls (mostly strikes from 20 to 25, thus making VIX skew higher as =ell). At 91, VVIX is somewhat expensive for this level if VIX =utures and it advocates in favor of low premium trades in VIX (hence =preads rather than outright options). Given the overall picture in the VIX market =urrently (ETPs long $180m vega, steep VIX term structure, high VVIX), =e favor being long through August call spreads or Aug/Sep calendar call =preads: - buy Aug 15 / 21 call spread for $1.10, ref 15.30 (that is =alf the expected roll down of $2.20 for being long 1m VIX future over 1 =onth); - buy Aug 17 call, sell Sep 24 call for $0 cost, ref 15.30 =nd 17.50 (the expected cost to buy back the Sep 24 call when Aug =xpires should be around $0.45 if VIX is at the same level as today and =he actual cost will depend on market conditions at the time). DISCLAIMER FOR =ARKET COMMENTARY This material =as prepared by Sales and Trading Personnel of Merrill Lynch. This =nformation is intended to provide informal, subjective comments =egarding the swaps market and is based on information from various publicly available sources. 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There is no guarantee that =he option strategies promoted will accomplish the stated objectives. =ptions trading is considered speculative and may result in the loss of a portion of or all of your initial investment, and/or =unds in excess of the principal invested. Prior to buying or selling an =ption, you should reference the Characteristics and Risks of =tandardized Options, "Option Disclosure Document" (ODD). All clients must receive a copy of the ODD prior to conducting =ny option trades. Electronic copies of the ODD and any supplements are =vailable on this website and the Option Clearing Corp website, located =t the following link: http://www.optionsclearing.com/about/publications/character-ris=s.jsp. 3 EFTA_R1_01311974 EFTA02343684 Amanda Ens Director =o:p class=""> Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, 5th Floor, New York, =Y 10036 The power =f global connectionsTM This message, and any attachments, is for the intended =ecipient(s) only, may contain information that is privileged, =onfidential and/or proprietary and subject to important terms and =onditions available at http://www.bankofamerica.com/emaildisclaimer. If you =re not the intended recipient, please delete this message. 4 EFTA_R1_01311975 EFTA02343685