EFTA02389554.pdf

From: Ens, Amanda < Sent: Friday, February 24, 2017 822 PM To: Jeffrey E.; Richard Kahn Subject: RE: Cheap hedge I wanted to follow up on the best-of-put idea we dis=ussed a while back. > 1. &=bsp; Markets are near all-time highs 2. &=bsp; Implied volatility is low (but tends to pick up in = sell-off, benefitting this trade) 3. &=bsp; Implied correlation is low (but tends to pick up in=a sell-off, benefitting this trade) ==> Best-of-puts thus look very attractive<=o:p> Given high client interest recently in best-of-puts;here is a list of the top 10 lowest premium strategies for 6 month 95% bes=-of-puts struck on 3 sector ETF underlyings. ETF underlyings + pre=ium: &nbs=; XLB .1 XLU .1 XLV .1 0.93% XLB .1 XLU .1 XLY .1 0.99% XLB .1 XLK .1 XLU .1 1 EFTA_R1_01414137 EFTA02389554 1.00% XLE .1 XLU .1 XLV .1 1.00% XLU .1 XLV .1 XLY .1 1.01% XLB .1 XLF .1 XLU .1 1.04% XLK .1 XLU .1 XLV .1 1.04% XLI .1 XLU .1 XLV .1 1.05% XLE .1 XLK .1 XLU .1 1.06% XLF .1 2 EFTA_R1_01414138 EFTA02389555 XLU .1 XLV .1 1.07% XLE .1 XLU .1 XLY .1 1.07% XLB .1 XLE .1 XLU .1 1.09% XLK .1 XLU .1 XLY .1 1.10% XLF .1 XLU .1 XLY .1 1.11% XLI .1 XLU .1 XLY .1 1.11% Implied correlation (as measure by SPX vs its underl=ing components) has fallen to multi-year lows. This drop in correlation, a= well as the drop in implied volatility cheapens the cost of this option.<=:p> 3 EFTA_R1_01414139 EFTA02389556 Generally, as markets fall in value, realized<=u> correlation has historically picked up. Given this is a put structu=e, an uptick in realized correlation on the downside makes the put more va=uable. Graph below shows the 1-month moving average correct=on based on price movements for XLB-XLU-XLY.=/span> Source: Bloomberg Regards, Amanda From: Ens, Ama=da Sent: Thursday, December 15, 2016 9:22 AM To: 'Jeffrey E.'; 'Richard Kahn' Subject: Cheap hedge While we are still const=uctive equities and see further upside potential, given the large recent m=ves and our binary view of the markets for 2017 (+20% bull case / -30%=bear case - see below), buying cheap tail protection to hedge a long equity portfolio is prudent. =/p> =/p> You can achieve signific=nt savings on a tail hedge by monetizing the low correlations between sect=rs that we have seen in the multi-year bull market. In a tail event, corre=ations generally move towards 1 as you know very well. Buy a best-of-put on 3 sectors: tech, consumer=discretionary and utilities * Underlying ETFs: XLK (Tech Selector Sector S=DR), XLY (Consumer Discretionary Select Sector SPDR), XLU (Utilities Selec= Sector SPDR) • Your payoff is on the best performing of the=3 sectors 95% strike<=o:p> 4 EFTA_R1_01414140 EFTA02389557 o 6 months: 1.0% p=emium o 1 year: 1.85% pr=mium =/p> This is - 64% savings compared to a 6 month SPX 95% p=t (2.75%) and a 1 year SPX 95% put (5.1%) =/P> We like the best-of-put =ecause all three sectors are near cycle or all-time highs and should all b= vulnerable in a large market pullback, especially in a tail event. Even u=ilities, a defensive sector, are less safe in our view given elevated valuations and crowding. Our utilities ana=yst sees 10% downside to the sector with the 10y at these levels (2.62% to=ay) and 16.7% downside at 3.0%. =/P> There is a high amount o= potential leverage on this trade — for example, on the 1 year best-=f-put, if the sectors were all down > 20%, you would have 8.1x payoff o= your premium (15%/1.85%). =/p> <http://rsch.baml.com/r?q=Xs2Bc=MU6pTCNQs.IR2M5.1w&e=amanda.enst/A0baml.com&h=1PXt6Q> US Equity Strategy Year Ahead: 2017 — the year ahead: Euphoria or fisca= fizzle? chttp://rsch.baml.com/r?q=Xs2Bc6MU6pTCNQsJR2M5Jw&e=3Damanda.ens%40baml.com&h=1PXt6Q> Savita Subramanian think= 2017 could be anything but normal — Subramanian notes that if the m=rket moves from skepticism to euphoria then the S&P 500 could trade as=high as 2700 in a bull case scenario. Meanwhile, applying typical (not extreme) recessionary returns to current S&P 500=levels yields a bear case scenario of 1600. Her base case is a year-end 20=7 S&P500 target of 2300. 10 Year Graph: XLY, XLIC, XLU Source: Bloomberg Regards, Amanda Amanda Ens Director 5 EFTA_R1_01414141 EFTA02389558 Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporat=d One Bryant Park, 5th Floor, New York, NY 10036 go:p> Phone: Mobile: The power of global co=nectionsm This message, and any attachments, is for the intended recipient(s) onl., may contain information that is privileged, confidential and/or propriet=ry and subject to important terms and conditions available at http://www.b=nkofamerica.com/emaildisclaimer. If you are not the intended recipient, =lease delete this message. 6 EFTA_R1_01414142 EFTA02389559