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Chart 13: The -2.5% drop in the NDX on 17-May was a six standard deviation (60) event relative to trailing realized volatility and the fourth worst risk-adjusted daily return since 1985 Chart 14: The 60 sell-off in the NDX on 17-May has helped drive short- dated Tech implied vol higher relative to S&P vol, although the absolute level of Tech vol still remains historically low 6 40% 16% 4 35% NDX vol = 2nd %-ile 44% 2 30% 12% 0 25% 10% 20% 8% : 15% 6% 4 10% A% 6 5% 2% 8 0% ~—_ ___o@ 0% Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 '85 ‘87 '89 '91 '93 ‘95 ‘97 ‘99 ‘01 ‘03 ‘05 ‘O07 '09 11 13 '15 17 Daily NDX return / trailing (EWMA) vol 1 ——— 17-May-17 Source: BofA Merrill Lynch Global Research. Daily data from 4-Feb-85 through 2-Jun-17. EWMA = exponentially-weighted moving average realized volatility with lambda = 0.94. Hedge near-term reversal risk via FANG stock replacement or NDX put spreads As we have previously noted, asset bubbles can be notoriously difficult to trade, as fundamentals give way to chasing higher highs, and derivatives can be a key tool for capturing asset price upside while mitigating reversal risk. — NDX 3M ATM implied vol NDX - SPX 3M ATM implied vol spread (right) Source: BofA Merrill Lynch Global Research. Daily data from 17-Jun-09 through 2-Jun-17. Chart 15: Proxy hedge screen for a Nasdaq 100 (NDX) benchmark suggests NDX is the best hedge for itself, as basis risk runs too high with other assets 1) Nov08 (-39%) 2) Mar08 (-18%) 3) Mar09 (-15% 4 Augi1 (-14% 5) Feb16 (-13%) 6) Jul06 (-13%) 7) Jult0 (-12%) 8) Aug15 (-10% 9) Nov12 (-10% 10) May12 (-9%) S&P500 © OZOIG om 7 3 DX ESTX50 @ 6 1 7 COLE 3m 04 NIKKEI @ 3 8 300_0_@ 10 HYG (8 9 105 ou ae FFF CK AO mCCOML OD SOG H __6 FISE @ © 1 D> OW f(0_© TWSE @ 5 7) 956 8 1 1004 HSI © 6 7 _6__O¢ 5110 NIFTY © 8 m0 : 6 HSCEI © 6 7 3 e 1(8 pm ON 4 2 5 | KOSPI @ 5 8 93 mn 6 ml 10 4 Aluminum @) G 8 3) @ AO 7 EEM US @ AGG (8 )6 mm 4) 10 TUT? OCDmE 9) Summ 7 a | ee | () ASX200 © 6)(8 5) wm} G 2 RDXUSD @ 2 [G ge D_@ ! 10 AUDUSD © 9 8 3) o% | NT GLD* 40 3 8) @ 7 ‘ 54 2 CADUSD @G 6) = ¢_ 00_@ 1 NZDUSD (8 DIG CO Gl Copper (6 £8 e @ @ OO @ EURUSD © 3) 09 7 ' () USDJPY @ 4 CLOG _Ov.__¢ ‘ BOVESPA (2 OGIO 1) 4 TOP40 @) ©) 40 6 _@ 3 i Crude Oil (619 3) @ @ 6_0_0O_7 1 GBPUSD @Y2 0.60__?) | ! ° Average -0.5 0.0 0.5 1.0 15 2.0 25 Estimated hedge benefit per unit cost vs. NDX Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17. *Call option volatility used. We continue to like hedging the risk of a US Tech overshoot via stock replacement Strategies, for example, stock replacing long “FANG” positions with either cheap calls on the individual FANG stocks or with outperformance calls on FANG vs. S&P. 6 Global Equity Volatility Insights | 06 June 2017 oat @ HOUSE_OVERSIGHT_023580