Bank of America Merrill Lynch Global Equity Volatility Insights – Market Trade Recommendations (June 20, 2017)

Global Equity Volatility Insights Want a cheap call on EU equity? Monetise correlation through EU bank dispersion we estimate 68% of the 20 June 2017 Unauthorized redistribution of this report is prohibited. This report is intended for [email protected] US Extract alpha from summer SPX range as policy and positioning “collar” equities With the Federal Reserve last week appearing more emboldened to normalize monetary policy, risk asset bears have come out in force. While we agree that a changing Fed reaction function is likely not supportive of substantial equity upside, we think the “Yellen put” still exists, albeit with a lower strike. Hence, we see monetary policy as providing a near-term “collar” (long put/short call) on a US equity market already prone to getting trapped in record-tight trading ranges. Further impetus for a summer rangetrade should come from (i) fiscal policy, as gridlock caps equity upside but policy hope floors the downside, and (ii) positioning, where the risk of continued “fragility events” (potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-up investors still accustomed to buying dips. As a risk-limited range trade, we like buying in-the-money down and out puts on the S&P. For example, an SPX Sep 2475 put that knocks out at 2300 (6% OTM) indicatively costs 70bps (spot ref 2451), a 60% discount to the 2475 / 2300 put spread. Europe Long EU banks dispersion: Buy Dec17 call on a basket, sell worst-of call We recommend positioning for greater dispersion in EU bank sector returns via buying a Dec17 105% call on an equally-weighted basket of Santander, BNP, ING, Intesa and Deutsche Bank, part-financed by selling a worst-of call on the same basket for 1.8% (net) indic., as: 1) improving macro/earnings, sensitivity to rates and regulatory headwinds are likely to lead to greater differentiation within banks, 2) the entry point is attractive given historically low implied vol (13 th 8y+ percentile) and high implied correlation (81% bid vs latest 6M realised correl of 66%), 3) historical risk-reward at current pricing is attractive (avg. P&L of +8.4% when positive vs -1.8% when negative), and 4) the trade can be considered as a cheap call on EU equities as it has a similar payoff profile but with greater benefit relative to its cost. Asia Buy depressed China vs. US risks through corridor variance spreads As global central banks have taken on more hawkish tones, the uncertainty surrounding policy tightening will be more positive for EM volatility than for DM volatility. Additionally, our strategists have a more bearish outlook for the Chinese banking sector (which makes up a majority of the HSCEI index) amid rapidly rising leverage, complex shadow banking, and excessive home price inflation. Since we believe the global synchronized monetary tightening will impact HSCEI volatility more than SPX volatility, we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points, a 3 vol point discount to a vanilla variance spread. The entry point is attractive as the HSCEI- SPX 18-month variance swap spread has fallen back to the lower-end of its 5-year trading range, the trade has a positive carry, and it benefits during China risk-off events. >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with issuers 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. Refer to important disclosures on page 28 to 29. Analyst Certification on page 27. 11756528 Timestamp: 20 June 2017 01:18AM EDT Equity Derivatives Global Global Equity Derivatives Rsch MLPF&S Anshul Gupta >> Equity-Linked Analyst MLI (UK) Nitin Saksena Equity-Linked Analyst MLPF&S William Chan, CFA >> Equity-Linked Analyst Merrill Lynch (Hong Kong) Abhinandan Deb >> Equity-Linked Analyst MLI (UK) Benjamin Bowler Equity-Linked Analyst MLPF&S [email protected] Jason Galazidis >> Equity-Linked Analyst MLI (UK) Clovis Couasnon >> Equity-Linked Analyst MLI (UK) Chintan Kotecha Equity-Linked Analyst MLPF&S Michael Youngworth Equity-Linked Analyst MLPF&S Nikolay Angeloff Equity-Linked Analyst MLPF&S See Team Page for List of Analysts Table 1: 3M volatility (weekly changes) Implied Realized S&P500 9.8 (-0.2) 7.1 (-0.2) ESTX50 13.4 (0.3) 11.5 (0.2) FTSE 10.0 (-0.4) 9.7 (0.2) DAX 12.6 (0.3) 10.7 (0.5) NKY 13.8 (-0.2) 12.3 (-0.2) HSI 12.4 (0.1) 10.1 (0.2) KOSPI 12.2 (0.3) 10.5 (0.1) EEM US 15.6 (0.5) 11.8 (-1.1) TOP40 16.9 (1.2) 11.1 (0.3) RDX 25.9 (0.9) 20.6 (-1.1) IBOV 22.9 (-1.7) 25.5 (-0.7) ISE30 20.2 (0.4) 13.5 (0.1) Source: BofA Merrill Lynch Global Research BofAML GFSI TM X-Asset Risk Landscape Stress now below normal for all asset classes The indicator was little changed last week, finishing at -0.23. • Stress is now in benign territory across all five asset classes: Stress in across all asset classes (except equity) declined last week. Notably, rates stress turned negative (benign territory) and stresses across all five asset classes are now negative. • Stress in Equity skew rose as ESTX50 and (to a lesser extent) S&P500 skew steepened; indeed the gain in ESTX50 skew was the greatest across GFSI subcomponents (Chart 2) and also historically significant (Chart 5). • Commodity-related stresses fell the most across asset classes (Chart 3), led by declines in Crude and Gold vol (Chart 2), reversing some of the gains after geopolitical tensions in the Middle East rose in recent weeks. Chart 1: Latest* stress across GFSI sub-components 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 GFSI Stress 1.48 1.39 Govt-OIS EUR Basis Swap USDJPY 1.00 0.81 Basis Swap EURUSD Euro member Bond… 0.54 Nikkei Skew Red shaded area highlights components in Bearish territory ESTX50 Skew Bond Basis EUR Govt-OIS USD HY Bond Flow Source: BofA Merrill Lynch Global Research. *Latest as of 16-Jun-17. Risk Skew Flow Green shaded area highlights components in Bullish territory -1.17 -1.18 -1.24 -1.38 -1.45 CDS Index Skew USD CDS Index Skew EUR USDJPY Skew Bond Basis USD Libor-OIS USD Equity Fund Flow EM SP500 Skew IG Foreign Sovrn Bond… Libor-OIS GBP GBPUSD Imp Vol Libor-OIS JPY EURJPY Skew Sub IG Foreign Sovrn… Libor-OIS EUR HY Corp CDS USD IG Corp CDS USD IG Corp CDS EUR Comdty Imp Vol Crude Volume Flow HY Corp CDS EUR AUDJPY Skew HSI Imp Vol USDJPY Imp Vol FTSE Imp Vol Money Mkt Flow ESTX50 Imp Vol Comdty Imp Vol Copper SP500 Imp Vol 3Y/5Y Credit Curve EUR Int Rate Imp Vol USD Comdty Imp Vol Gold Nikkei Imp Vol EURUSD Imp Vol Int Rate Imp Vol EUR Chart 2: Change** in stress across GFSI sub-components 0.8 Change in GFSI Stress 0.4 0.0 -0.4 -0.8 0.65 ESTX50 Skew 0.21 CDS Index Skew EUR 0.12 0.10 SP500 Skew GBPUSD Imp Vol 0.07 Libor-OIS USD Source: BofA Merrill Lynch Global Research. **Latest as of 16-Jun-17. Change vs 1 week prior (9-Jun-17). The GFSI Risk Allocator (using Bull, Bear & Neutral weights of 2, 0, 1) suggested a 17.4% overweight position on 16-Jun (vs 13.0% OW as of 9-Jun). The percentages of Bullish, Bearish and Neutral GFSI components (as used in the Risk Allocator) as of 16-Jun were 34.8%, 17.4% and 47.8% respectively. -0.20 -0.23 -0.23 -0.37 -0.38 Govt-OIS USD Govt-OIS EUR ESTX50 Imp Vol Equity Fund Flow EM HY Corp CDS USD Bond Basis USD Sub IG Foreign Sovrn… IG Corp CDS USD HSI Imp Vol Nikkei Skew USDJPY Imp Vol Libor-OIS JPY Libor-OIS EUR Money Mkt Flow HY Corp CDS EUR IG Foreign Sovrn Bond… HY Bond Flow Libor-OIS GBP SP500 Imp Vol Nikkei Imp Vol IG Corp CDS EUR 3Y/5Y Credit Curve EUR EURJPY Skew FTSE Imp Vol Int Rate Imp Vol USD Comdty Imp Vol Copper Int Rate Imp Vol EUR Euro member Bond… EURUSD Imp Vol CDS Index Skew USD Basis Swap EURUSD Basis Swap USDJPY Comdty Imp Vol Gold AUDJPY Skew Comdty Imp Vol Crude USDJPY Skew Bond Basis EUR Volume Flow Risk Skew Flow 2 Global Equity Volatility Insights | 20 June 2017 Chart 3: Stress in commodities fell the most last week (driven by a drop in crude oil vol) while stress in equities rose marginally (led by equity skew) 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 0.04 -0.03 -0.03 -0.08 -0.16 Equities Credit Rates FX Commodities Chart 4: EM and the US are the least stressed GFSI regions globally 0.05 0.00 -0.05 -0.10 -0.15 -0.20 -0.25 -0.30 -0.35 -0.40 0.02 0.02 -0.01 -0.03 EM Europe Japan US Latest stress (16-Jun-17) Change in stress Latest stress (16-Jun-17) Change in stress Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17). Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17). Chart 5: Top 10 movers in stress (1-week abs chg %-ile vs history*) %-ile of abs chg in stress vs history* 100% 90% 80% 70% 60% 50% 92% ESTX50 Skew 83% 82% 82% 81% 80% 79% 79% 77% Libor-OIS USD USDJPY Skew Bond Basis EUR Basis Swap EURUSD Comdty Imp Vol Gold Basis Swap USDJPY 67% Source: BofA Merrill Lynch Global Research. * %-ile of weekly move in stress vs all historical weekly moves (earliest 3-Jan-00). Bar colours represent rise (red) or fall (green) in stress. 1wk change (9-Jun- 17 to 16-Jun-17). AUDJPY Skew Stress fall Stress rise Euro member Bond Spread Comdty Imp Vol Crude Chart 6: Global volatility & credit spread stress in the GFSI 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 0.01 0.01 HY CDS Latest stress (16-Jun-17) FX Vol IG CDS 0.00 -0.01 -0.02 -0.06 Equity Vol Change in stress Sovrn risk Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17). Rates Vol -0.16 Commodity Vol Global Equity Volatility Insights | 20 June 2017 3 Volatility in the US Risk-limited alpha in a “collared” market: SPX ITM KO puts US equities vulnerable…to a summer range-trade The Federal Reserve last week appeared more emboldened to normalize monetary policy, not only raising interest rates by 25bps but also reiterating its intention to hike four more times by the end of 2018 and stating that it “expects to begin implementing a balance sheet normalization program this year” - all despite recent softness in inflation data. Breakeven rates of inflation narrowed following the Fed communications due to tighter monetary conditions in the face of slowing US economic data, and risk asset bears responded in force, suggesting that Janet Yellen had “broken up” with investors and that it would be prudent to sell “before it’s too late”. We agree that the changing reaction function of the Fed is likely not supportive of further substantial US equity upside and may be viewed as the Fed now providing a short call option on the S&P 500. However, in our view, it is premature to conclude from last week’s developments that the “Yellen put” is dead. We see its strike as declining but would not underestimate Yellen’s dovish inclinations in a shock or the capacity for the Fed to still remain credibly on hold as long as the US economy is not “running hot”. In short, we see monetary policy as now providing a “collar” (long put / short call) on a US equity market that has already shown a propensity over the past year for getting trapped in record tight trading ranges. 1 Other factors may also conspire to create a summer range-trade for US equities, namely (i) fiscal policy, where gridlock likely caps equity upside but lingering policy hope floors the downside, and (ii) positioning, where the risk of continued “fragility events” (potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-up investors still accustomed to buying dips. Tug of war between fragile market/stretched positioning and cashed-up dip-buyers As we have noted recently, US equities have displayed a historically unusual tendency to jump rapidly from calm to stress and back (“fragility”), with the recent Tech sell-off and rebound the latest example. For example, in the past year, the S&P 500 has seen 5sigma declines (3 in total—Brexit, Sep-16, May-17) occur 20x more frequently than over the prior 90 years or so. The increased frequency of these “fragility events” is in part due to vol failing to remain high post a spike as equity market participants continue to aggressively “buy the dip” and in the process reset vol lower. Historically low vol alongside consistently upward trending equity markets and low cross asset correlations could be creating stretched positioning across markets. For example, upward trending equities on historically low vol may be pushing CTA equity positioning to near record levels (Chart 7). Risk parity portfolios could be increasing their leverage due to low vol as well as low cross asset correlation (Chart 8). And lastly, inverse VIX ETPs have seen increased open interest as performance has swelled on the back of continued declines in vol and attractive term structure risk premia (Chart 9). Should vol spike again alongside a reversal in equity price momentum and a rise in cross asset correlations, then unwinds from these strategies could exacerbate market fragility. However, this must be weighed against an investor base that has plenty of cash on hand (Chart 10) and their potentially fickle but still-intact tendency to view any equity market dip as an alpha opportunity. 1 For example, the Dow Jones Industrial Average traded in its tightest trading range in over 110 years in Jan-17; this followed a record in the S&P 500 ending Sep-16 for the longest stretch of trading within a range of 1.77% since 1928. 4 Global Equity Volatility Insights | 20 June 2017 Chart 7: A combination of upward trending global equity markets and very low volatility have conspired to push trend following (CTA) equity positioning to near record levels. Consequently, the beta of CTA strategies to global equities is also at extreme levels Chart 8: Owing to low cross asset vol and strong diversification, the volatility of risk-balanced multi-asset portfolios has fallen to historically low levels. Consequently, leverage levels across multi-asset & other portfolios that target fixed vol have likely hit their caps 1.00 0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 MSCI World (Ratio of trend strength to volatility) (LHS) BofAML Model CTA Global Equity Allocation (RHS) May-17 20 15 10 5 0 -5 -10 -15 -20 24% 20% 16% 12% 8% 4% 0% 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Model Risk Parity Leverage (Vol Target: 10% & Max Leverage: 3x) (RHS) Unlevered BofAML Model Risk Parity Volatility (LHS) 3.0x 2.5x 2.0x 1.5x 1.0x 0.5x 0.0x Source: BofA Merrill Lynch Global Research. Based on daily data form 2-Jan-2015 to 16-Jun-2017. CTA = Commodity Trading Advisor It is important to note that not all CTA, risk parity, or vol control strategies operate similarly and there is model risk in estimating the exact size of these trading flows. Source: BofA Merrill Lynch Global Research. Based on daily data from 3-Jan-72 through 16-Jun-17. Equity, fixed income, and commodity components within the hypothetical risk parity investment are represented by the S&P500, 10-Year US Treasury Bonds, and the S&P GSCI Index, respectively. Risk parity allocations are determined and rebalanced monthly using prior 12-month realized volatility and correlations. Chart 9: The vega outstanding in inverse VIX ETNs has also reached a record high at ~$125mn vega Chart 10: Global FMS average cash balances (%) remain elevated, suggesting dry powder for investors still conditioned to buy equity dips VIX ETP open interest ($mn vega) 350 Unlevered long Levered long 300 Inverse Net vega across VIX ETPs 250 200 150 100 50 0 -50 -100 -150 2012 2013 2014 2015 2016 2017 Source: BofA Merrill Lynch Global Research. Daily data from 13-Feb-12 through 16-Jun17. Extract risk-limited alpha from SPX range via cheap in-the-money knockout puts As a risk-limited range trade, we like owning down-and-out puts on SPX that are already in-the-money. For example, the SPX Sep 2475 put with a 2300 knock-out (continuous observation) indicatively costs 70bps (spot ref 2451) and offers a 60% discount to the vanilla 2475/2300 put spread, which is itself historically cheap (Chart 12). If SPX stays above the 2300 barrier at all points in time before expiry, the structure is equivalent to a 2475 put option. If the barrier is instead breached, the maximum loss will be equal to the (low) upfront premium. The 2300 barrier is about 6% out-of-themoney, hence “allows” for the elusive 5% correction not seen since Brexit (on a closing basis). However, investors can mitigate the risk of breaching the barrier by either moving it farther down (e.g., a 2245 barrier would indicatively raise the cost from 0.7% to 1%), or by only observing it on a close-to-close basis (in turn sacrificing part of the discount). 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% Backtest Actual 3.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 2400 2200 2000 1800 1600 1400 1200 1000 FMS avg cash balance (%) S&P 500 (RHS) Source: BofA Merrill Lynch Global Fund Manager Survey, Bloomberg. As a reminder, the FMS Cash Rule works as follows: when average cash balance rises above 4.5% a contrarian buy signal is generated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated. 800 600 Global Equity Volatility Insights | 20 June 2017 5 The trade prices attractively today due to exceptionally steep SPX put skew, which is near its highs established since 2004 (Chart 11). With steep SPX put skew, the market is implicitly pricing in a high probability that the option will knock-out during its life, i.e., that relatively large drawdowns are more likely. As detailed above, however, we see many reasons why the most likely near-term scenario for US equities is to remain range-bound. The structure is short 11% delta at inception and has the same vega sensitivity as the equivalent put spread (short 6bps). Chart 11: SPX put skew is near the all-time highs reached since 2002. Steep skew helps cheapen knockout puts as the market is implying a relatively high probability of the barrier being breached Chart 12: The price of SPX put spreads is already near the lows reached since 2002. In particular, the price of a 3m 50d-25d put spread is ~1.02%, in the 0.1 st %-ile since Nov-02 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 SPX 3m 90-100 put skew 16-Jun-17 SPX 3m 50d - 25d put spread 16-Jun-17 Source: BofA Merrill Lynch Global Research. Data from Jan-04 to 16-Jun-17. The 90 and 100 strikes are based on the SPX forward. Source: BofA Merrill Lynch Global Research. Data from Nov-02 to 16-Jun-17. 6 Global Equity Volatility Insights | 20 June 2017 Notable trends and dislocations (US) The Fed turns more hawkish, though vol remains subdued Last week, unsurprisingly the Fed opted to hike benchmark rates another 25bps. However, the market was more focused on the FOMC’s unexpectedly hawkish message, which indicated that it is willing to normalize policy despite weaker-than-desired inflation. Our economists now think the Fed will announce balance sheet normalization in September and will hike rates again in December. A more hawkish Fed could result in higher real rates and a stronger USD, which ultimately should benefit our Growth to Value rotation trade of long XLF calls versus short QQQ calls (see Chart 15). The S&P 500 was more-or-less flat week-over-week as it gained only 6bps. The tech selloff continued, however, and the Nasdaq-100 dropped 105bps. Similarly, the Russell 2000 also dropped 105bps. Despite concerns on the Fed, the VIX fell 0.32 vol points to 10.38, and SPX 1m ATM implied vol declined 0.3 vol points to 7.6%. Chart 13: The Nasdaq has set a new record for consecutive days without a 5% peak-to-trough drawdown 160 140 120 100 80 60 40 20 150 136 135 111 104 98 97 95 94 92 86 74 71 67 65 61 56 55 54 53 51 50 50 48 46 46 43 40 38 30 28 21 17 15 11 11 11 11 8 7 5 On June 9, the Nasdaq dropped nearly 2% as investors unwound crowded positions, resulting in a sudden selloff from a period of relative calm. However, despite the volatility among tech names during the first week of June, the Nasdaq (CCMP) has not seen a 5% drawdown from a prior peak (using closing data) in 150 days. This is the longest such streak in the Nasdaq’s history. Prior to today, the longest periods of similar calm occurred during July ’83 and July ’86, when the index did not record a 5% drawdown from a peak in 136 and 135 days respectively. 0 16-Jun-17 14-Jul-86 27-Feb-97 21-Jun-71 22-Nov-93 20-Aug-15 19-Nov-91 3-Nov-16 29-Sep-80 29-Mar-94 5-Feb-99 4-Oct-95 8-Dec-80 14-Apr-87 3-Mar-80 14-Mar-00 22-Jul-99 21-Sep-78 19-Apr-99 28-Jan-00 15-Oct-99 Source: BofA Merrill Lynch Global Research. Data from 1-Feb-71 to 16-Jun-17. Drawdowns measured from prior peaks and using close-to-close data. Chart 14: On 16-Jun, the SPX had its 11 th consecutive session of moves not exceeding 0.5% in either direction on a close-to-close basis. This is the 4 th time this year that such a streak has surpassed 10 days 50 40 30 20 10 0 '64 '65 '52 '17 '59 '62 '63 '67 '95 '51 '53 '66 '68 '72 '93 '16 Max # of days without an up or down move > 0.5% (LHS) # times SPX has gone for 10 days w/o a 0.5% move (RHS) Source: BofA Merrill Lynch Global Research, Bloomberg. Data from Jan-1928 to 16-Jun-2017. 10 8 6 4 2 0 Last week the S&P 500 recorded its 11 th session without a move larger than 0.5% in either direction. As a result, 10d realized vol stood at 3.31% as of 16-Jun. This is already the fourth time this year that SPX has gone more than 10 consecutive days without a move greater than +/- 0.5%. This has historically happened only in ’64, ’65 and ’52. The longest such stretch this year lasted 15 consecutive trading sessions and ended on 16-May. For comparison, in ’64 SPX had 8 stretches without such a move with the longest stretch spanning 43 days. Global Equity Volatility Insights | 20 June 2017 7 Chart 15: Buying an XLF 1m ATM call financed by selling a QQQ 1m call is still an attractive way for investors to rotate out of Growth and into Value 1.3 1.1 0.9 0.7 0.5 2012 2013 2014 2015 2016 2017 # of 1m XLF calls one 1m QQQ call buys Current (99th %-ile) Average Last week, we highlighted that investors who want to rotate out of Growth strategies into Value strategies should take advantage of elevated tech vol by buying XLF 1m ATM calls financed by selling QQQ 1m ATM calls. After last week’s FOMC meeting, the case for such a trade grows even stronger as the market thinks the Fed has become more hawkish, driving up real rates and the USD. Amid this backdrop, one could see outperformance of Value names over Growth names, which tend to have higher amounts of offshore revenues that would come under pressure by a stronger dollar. Additionally, the trade remains attractive at current levels as pricing has only been better 1% of the time in 5 years. Today, 1.03 XLF calls could be bought for each QQQ call sold, whereas over the past 5 years, the average number of XLF calls that could be purchased was only 0.80. Source: BofA Merrill Lynch Global Research. Data from 9-Jun-12 to 16-Jun-17. Table 2: Current S&P500 volatility and correlation measures relative to the prior two year of historical daily data 1-week change Over 2-year historical period 16 Jun 17 9 Jun 17 Change Current ranking Minimum 25% Median 75% Maximum 1-month ATM implied volatility 7.6% 7.9% -0.3% 1.3% 7.1% 9.8% 11.7% 14.5% 31.8% 1-year ATM implied volatility 14.0% 14.0% 0.0% 7.7% 13.4% 15.3% 16.2% 17.3% 22.5% 1-week intraday realized volatility 7.8% 7.3% 0.5% 19.6% 5.2% 8.3% 10.6% 14.0% 53.7% 1-year minus 1-month term structure 6.5% 6.1% 0.4% 99.2% -12.0% 2.7% 4.4% 5.4% 7.0% 3-month 90 minus 110 skew 8.5% 8.3% 0.2% 16.1% 7.1% 9.4% 11.3% 11.8% 13.8% 1-year top 50 implied correlation 45.44 45.10 0.35 8.1% 42.03 49.37 54.22 57.14 65.55 3-month top 50 realized correlation 21.30 24.08 -2.78 16.8% 12.57 27.15 37.28 48.45 60.41 VIX 1-month ATMf implied vol 81.9% 80.0% 1.9% 39.9% 61.2% 78.2% 85.0% 95.2% 162.2% VIX 1-month 110 minus 90 skew 27.1% 26.9% 0.2% 88.6% 9.3% 18.6% 21.5% 23.8% 30.3% Source: BofA Merrill Lynch Global Research 8 Global Equity Volatility Insights | 20 June 2017 Volatility in Europe Buy EU banks dispersion: (+) basket call, (-) worst-of calls Trade: Long Dec17 105% call on an equally weighted basket of SAN, BNP, ING, ISP & DBK*, short Dec17 ATM worst-of call on the same basket for 1.8% indic. (correl bid: 81%). * We pick the top 5 stocks with the largest market cap within the SX7E (EU banks sector index) corresponding to 5 different countries We have previously highlighted our preference for vol dispersion trades both in the US and the EU – with the most recent recommendation being sector dispersion opportunities within the EU. In a similar vein, we suggest positioning for greater dispersion within EU banks via buying a call on a basket of Santander, BNP Paribas, ING, Intesa and Deutsche Bank part-financed by selling a worst-of call on the same basket as: • Improving macro/earnings, sensitivity to rates and regulatory headwinds likely to lead to greater differentiation within banks: An improving macro backdrop in Europe & ongoing improvement in EPS revisions (see Style Cycle) paint a bullish picture for EU banks as they are seen as leveraged macro plays within the EU. However, we believe there is a potential for greater differentiation within banks as our bank analysts have argued before (here and here) that: (i) some banks stand to benefit more than others based on their earnings power should the uptick in the earnings cycle continue, (ii) banks’ gearing to interest rate cycles, and therefore likely impact from a more hawkish ECB, varies between different banks and (iii) French and Benelux banks are likely to be most impacted under potential Basel IV regulations. • Entry point is attractive given historically low implied vols: The structure benefits from its long vol bias as average 6M implied vol on the basket of 5 European banks is historically low (13 th %-ile since Jan-08, Chart 16). • High implied correlation beneficial for structure’s short correlation bias: Chart 17 shows the average pairwise 6M and 3M realised correlations between the 5 EU banks, which are historically low. Despite this recent drop in realised correlations, implied correlation is priced higher, thus providing an interesting entry point for the (short-correlation) trade. Global Equity Volatility Insights | 20 June 2017 9 Chart 16: SAN, BNP, ING, ISP and DBK average 6M ATMf implied vol is trading historically low (13 th percentile since 2008) 100% 80% 60% 40% 20% Mar-08 Mar-09 Mar-10 Mar-11 Basket of SAN, BNP, ING, ISP & DBK Mar-12 Mar-13 Mar-14 Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17 13th percentile Mar-15 Mar-16 Mar-17 6M avg realised vol 6M avg implied vol Last IV (16-Jun-17) Chart 17: Despite the recent drop in realized correlation, implied correlation is priced near the high end of the reaiised range for the basket of EU banks 90% 80% 70% 60% 50% 40% 30% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 3M realised correl 6M realised correl Dec17 implied correl Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17 • Attractive risk-reward profile at current pricing: As highlighted in Exhibit 1, historically the trade held to expiry, at current pricing, would have generated an average P&L of 8.4% when positive and -1.8% when negative. The risk-reward looks even more attractive in extreme market outcomes as the max P&L of the trade which is greater than 75% compares to the max loss of only 5.7%. The trade also provides an effective way to gain long exposure to EU equities with limited risks, as evident from the call-like payoff in Exhibit 1 (vs the ESTX50). It is worth noting that, by construction, the maximum loss of the trade is 6.8% with the most likely loss limited to the upfront premium of 1.8%. We also note that the trade payoff profile is superior to a SX5E Dec17 ATM call when sized such that: (i) the call premium is the same as the upfront premium for the dispersion trade (=1.8%, blue line), as well as (ii) when the call premium is the same as the theoretical maximum loss for the trade (=6.8%, orange line). Exhibit 1: Hypothetical back-test of long Dec17 105% call on a basket of SAN, BNP, ING, ISP & DBK, short Dec17 ATM worst-of call on the same basket (upfront premium = 1.8%) 80% ESTX50 6M returns Trade P&L (long basket call, short worst-of) 80% P&L 60% Avg P&L when positive: 8.4% Avg P&L when negative: -1.8% 70% 60% 40% 50% 40% 20% 30% 0% -20% 20% 10% 0% SX5E 0.46x Dec17 ~ATM call -40% Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 -10% SX5E 1.7x Dec17 ~ATM call SX5E returns -20% -60% -40% -20% 0% 20% 40% 60% Source: BofA Merrill Lynch Global Research. Data: 3-Jan-00 to 16-Jun-17. Back-testing is hypothetical in nature & reflects application of the strategy prior to its introduction. It is not actual performance & is not intended to be indicative of future performance. The two call payoff diagrams shown in the chart correspond to SX5E Dec17 3575 strike call sized such that upfront premium = 1.8% (0.46x notional, blue line, equal to the upfront premium for the trade) and 6.8% (1.7x notional, orange line, equal to potential max loss of the trade) 10 Global Equity Volatility Insights | 20 June 2017 Notable trends and dislocations (Europe) European equities ended the week lower mainly due to a tech-driven sell-off on 12-Jun during which the SX8P (European tech sector) witnessed its largest 1-day decline since the UK’s EU referendum. Nevertheless, implied vols across European indices remained mostly unchanged near 2 year lows. • European intra-sector correlation continues to decline while inter-sector correl has hit a floor: The average EU intra-sector 3m correlation is near a 10- year low currently. In contrast, the average 3m inter-sector correlation reached a 10-year low in Mar-17 driven by post US election reflation trades but is now rising off its lows likely driven by an unwind of reflation trades. • SX7E implied-realised correlation near 5-year highs: SX7E 6m implied correlation fell since Mar-17 but the implied-realised correlation spread remains in the 88 th 5-year percentile driven by even lower realised correlation. • ESTX50 3M put skew is near 5 year highs, in stark contrast to SXEP (European Oil & Gas equity) put skew which is close to 5 year lows. • The overall seasonality in ESTX50 realised volatility since 1987 has been one of relatively lower vol during the summer months vs. autumn. In particular, May stands out as the lowest vol month across most 10 year horizons, and this also appears to be the case so far this year. EU Intra-sector correl continues to decline while inter-sector correl is supported The average European intra-sector 3m correlation is near a 10-year low, partly driven by divergence within the personal & household goods, utilities, real-estate, autos and insurance sectors (Chart 18 and Table 3). Interestingly, the average 3m inter-sector correlation reached a 10-year low on 14-Mar-17 (as the 8-Nov-16 US election led to the outperformance of sectors sensitive to inflation) but inter-sector correlation now seems supported likely driven by the unwind of reflation trades (Chart 18). Global Equity Volatility Insights | 20 June 2017 11 Chart 18: European intra-sector realised correlation is near a 10-year low, which suggests that we are currently in a stock pickers environment 100% 80% 60% 40% 20% 0% Jun-07 Feb-08 Oct-08 Average SXXP 3m inter-sector correlation* Average SXXP 3m intra-sector correlation** 4th 10-yr percentile Jun-09 Feb-10 Oct-10 Jun-11 Feb-12 Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily returns and assuming current weights. Data from 16-Mar-07 to 16-Jun-17. *Average correlation between each of the 19 SXXP sector indices and the other SXXP sector indices. **Average of the 19 intra-sector correlations (in Euro) where the 19 sector indices are the indices which make up the SXXP index. Note that the average intra-sector correlation calculated using returns in local currencies is also near a 10-year low (2 nd 10-yr percentile). Oct-12 Jun-13 Feb-14 3rd 10-yr percentile Oct-14 Jun-15 Feb-16 Oct-16 Jun-17 Table 3: Personal & household goods, utilities, real-estate, autos and insurance are the top 5 sectors with the lowest 10-yr percentile of intrasector 3m realised correlation Intra-sector 3M correl Sector ticker Sector name Level 10yr %-ile SXQP Pers. & Hous. Goods 17% 0% SX6P Utilities 24% 1% SX86P Real estate 40% 1% SXAP Autos 41% 1% SXIP Insurance 32% 1% SXRP Retail 19% 4% SXTP Travel 26% 5% SXFP Financials 28% 5% SX4P Chemicals 28% 6% SXNP Industrials 30% 7% SXPP Basic res. 50% 11% SXDP Health care 24% 11% SXMP Media 27% 12% SXOP Construction 39% 13% SXKP Telcos 32% 14% SXEP Oil & Gas 42% 21% SX7P Banks 47% 23% SX3P Food & bev 31% 25% SX8P Tech 35% 35% Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily Euro returns and current weights. Data from 16-Mar-07 to 16-Jun-17. SX7E implied-realised correlation near 5 year high, driven by stock-level divergence SX7E 6m implied correlation has fallen since Mar-17 but the implied-realised correlation spread remains in the 88 th 5 year percentile (Chart 19). Notably, the low SX7E 6m realised correlation in 2017 was mostly driven by company-specific rather than regionspecific divergence (Chart 20). 12 Global Equity Volatility Insights | 20 June 2017 Chart 19: The SX7E 6m implied-realised correlation spread has been high throughout 2017 and remains in the 88 th 5-year percentile 100% 80% 60% 40% 20% 0% -20% Jun-12 Dec-12 6m implied correlation implied-realised spread Jun-13 Dec-13 Jun-14 Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. Implied and realised correlations are calculated using current weights. Dec-14 Jun-15 6m realised correlation Dec-15 55th percentile 8th percentile 88th percentile Jun-16 Dec-16 Chart 20: The decline in SX7E 6M realised correlation appears to be mainly due to company-specific rather than region-specific divergence 90% 70% 50% 30% '12 '13 '14 '15 '16 '17 Spread (rhs) Average inter-regional SX7E 6M realised correlation** SX7E 6M realised correl* 50% 40% 30% 20% 10% Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. *Calculated based on current weights of French, German, Italian and Spanish banks with enough price history. **We construct theoretical portfolios consisting of SX7E names from a given country (France, Germany, Italy and Spain) and compute the average pairwise correlation of their daily returns 0% Chart 21: ESTX50 3M put skew is near 5yr highs, in stark contrast to SXEP (European Oil & Gas equity) put skew which is close to 5yr lows 6.5% 5.5% 4.5% 100th percentile ESTX50 put 3M 90-100 (%fwd) put skew has re-steepened to near 5 year highs following the flattening which ensued after the first round of the French presidential elections (23-Apr). The recent ESTX50 skew dynamics are in stark contrast to what has been witnessed in the SXEP (European Oil & Gas equity), where the 3M 90-100 volatility spread has been trending lower and is currently near-flattest in 5 years. 3.5% 2.5% 2nd percentile 1.5% Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 SX5E 3M 90-100 put skew SXEP 3M 90-100 put skew Source: BofA Merrill Lynch Global Research. Data: 16-Jun-12 to 16-Jun-17. Global Equity Volatility Insights | 20 June 2017 13 Chart 22: May has typically been the month with the least amount of ESTX50 realised volatility. This has also been true in 2017 thus far 12% '07 to '17 '87 to '97 10% '97 to '07 Overall trend ('87 to '17) 2017 YTD 8% Average ESTX50 realised vol vs. May 6% 4% 2% 0% -2% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec The overall seasonality in ESTX50 realised volatility since 1987 (ESTX50 inception) has been one of relatively lower vol during the summer months vs. autumn. In particular, May stands out as the lowest vol month across most 10 year horizons, and this also appears to be the case so far this year. We note that Apr- 17 vol stands out mainly due to the 4% ESTX50 move on the Monday following the first round of the French presidential elections. Source: BofA Merrill Lynch Global Research. Data: 1-Jan-87 to 16-Jun-17. Chart 23: ESTX50 1M 100-110 call skew is near-flattest since 2008 12% SX5E 1M 100-110 (%fwd) call skew Current 10% 8% ESTX50 short-dated (1M) 100-110 (%fwd) call skew has flattened considerably since pre-French election (23-Apr) levels and currently stands near 9 year+ lows. Consequently, limited upside structures (e.g., call spreads) price attractively both from an ATMf volatility and skew basis. 6% 4% 2% 0% -2% '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17. Table 4: Volatility measures of major equity indices in the EMEA region (data as of 16-Jun-17) 3Mth ATM implied volatility 10D realised volatility 12Mth–3Mth ATM i-vol spread 3Mth 90-110 skew Equity index Weekly Weekly Weekly Weekly Weekly Current change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile Current change 2Yr percentile return ESTX50 13.4% 0.3% 2% 9.6% 2.0% 17% 3.4% -0.2% 99% 8.4% 0.9% 72% -1.2% FTSE 10.0% -0.4% 1% 8.6% 1.1% 24% 3.6% 0.2% 100% 6.2% 0.2% 9% -0.8% DAX 12.6% 0.3% 1% 12.7% 2.9% 29% 3.9% -0.2% 100% 8.5% 0.7% 67% -0.5% CAC 13.3% 0.3% 3% 10.3% 2.0% 21% 2.6% -0.1% 100% 8.6% 1.2% 77% -0.7% SMI 11.4% -0.1% 3% 12.2% 3.3% 44% 2.4% -0.1% 96% 6.5% 0.1% 27% 1.3% RDXUSD 25.9% 0.9% 29% 16.2% -1.2% 17% 0.9% -0.4% 58% 5.2% 0.4% 27% -3.7% TOP40 16.9% 1.3% 17% 10.6% 0.2% 15% 1.7% -0.5% 47% 8.0% 0.4% 36% -3.0% ISE30 20.2% 0.4% 6% 10.1% -1.4% 5% 3.1% -0.3% 81% 6.9% 0.1% 74% -0.8% Source: BofA Merrill Lynch Global Research 14 Global Equity Volatility Insights | 20 June 2017 European volatility: Sector snapshot Table 5: Volatility measures and indicative option prices for major European sector indices (data as of 16-Jun-17) Bearish <<<< --------------------------------------------------- >>>> Bullish 3Mth ATMf implied volatility Real vol* 3Mth 95%-85% put spread** 3Mth 100%-110% call spread** 3Mth 90%-110% risk reversal** Equity index Current Current Current Current Weekly change 2Yr %-ile Current price (% of spot) Weekly change (bps) 2Yr %-ile Max payout ratio price (% of spot) Weekly change (bps) 2Yr %-ile Max payout ratio price*** (% of spot) Weekly change (bps) 2Yr %-ile Weekly return SX3P (Fd&Bv) 10.7% -0.4% 2% 10.1% 0.6% -5 2% 16.4 2.1% -8 7% 4.8 -0.2% 5 80% 1.3% SX6P (Utils) 12.2% 0.0% 4% 10.9% 0.8% 2 4% 12.8 2.4% 1 5% 4.2 -0.3% 0 95% -0.1% SX7E (Banks) 22.7% 0.3% 2% 18.6% 1.9% 2 3% 5.4 3.6% 2 9% 2.8 -0.5% 0 52% -3.0% SX7P (Banks) 18.5% -1.2% 2% 13.1% 1.5% -10 3% 6.8 3.2% -15 5% 3.2 -0.4% 10 86% -1.9% SXAP (Auto) 16.7% -1.2% 1% 11.7% 1.3% -12 1% 7.8 3.0% -13 1% 3.3 -0.4% 6 68% -0.7% SXDP (Health) 13.0% -0.8% 1% 8.7% 0.9% -9 2% 11.5 2.5% -12 3% 4.0 -0.3% 4 71% 0.0% SXEP (Oil&Gas) 15.4% 0.0% 3% 11.8% 1.2% 0 3% 8.5 2.8% 2 2% 3.6 -0.2% -2 97% -1.3% SXIP (Insur) 14.0% -0.9% 1% 9.4% 1.0% -10 1% 10.0 2.7% -11 1% 3.7 -0.4% 6 83% 1.0% SXKP (Telecom) 15.4% 0.3% 3% 11.1% 1.1% 3 3% 8.8 2.8% 5 5% 3.6 -0.3% -3 83% -1.3% SXNP (Indust) 16.3% 0.1% 13% 10.9% 1.2% 1 23% 8.1 2.8% 1 10% 3.6 0.0% 0 100% -0.3% SXPP (Basic) 23.8% -0.7% 3% 17.8% 2.0% -7 3% 5.1 3.5% 0 4% 2.9 -0.3% -7 53% -4.8% SXQP (Prsnl&HH Gds) 10.2% 0.0% 1% 7.2% 0.5% -1 2% 18.5 2.0% -1 1% 4.9 -0.3% 1 76% 0.3% SXRP (Retail) 13.2% 0.4% 10% 12.8% 0.9% 8 10% 11.3 2.5% 14 10% 4.0 -0.1% -10 78% -3.3% SXTP (Trvl&Lsre) 14.4% 0.0% 7% 11.6% 1.0% 1 7% 9.9 2.7% 0 8% 3.7 -0.3% 1 41% 0.5% Source: BofA Merrill Lynch Global Research *Real vol = EWMA (Exponentially Weighted Moving Average) volatility, which measures historical price volatility but assigns greater importance to recent returns. Sigma(t)^2 = 0.94*Sigma(t-1)^2+(1-0.94)*r(t)^2, where r(t) is the return on day t. **Indicative mid prices; strikes as % of forward ***Negative values indicate that the bullish risk reversal takes in a credit. Global Equity Volatility Insights | 20 June 2017 15 Volatility in Asia Long HSCEI-SPX volatility spread via corridor variance Global synchronized monetary tightening is positive for EM vol Emerging markets have been the biggest beneficiaries of the central bank-fueled abundance of liquidity. However, we think the tide may be turning as last week, the Fed, ECB, and BOE all delivered policy announcements with hawkish tones. How far they really go to tighten policy when economic data is weakening still remains unknown. However, we think the uncertainty surrounding tightening will be more positive for EM volatility than for DM volatility. Chinese banks: Rapid increase in leverage is a big concern The HSCEI currently has a 70% weight in the financial sector. Recently, BofAML analyst Winnie Wu turned very bearish on the sector as (1) leverage has rapidly increased—debt to GDP rose by 18% in 2016 and may go above 300% by 2019, (2) shadow banking has become too big, too complicated, and too levered to easily regulate—even at the highest quality bank, China Merchants, off-balance sheet wealth management products (WMP) have grown to 40% the size of on-balance sheet assets from just 18% two years ago, and (3) excessive home price inflation—low and middle-income households are late to the party and a correction in prices could have a systemic effect as property assets have been used as collateral in WMPs. SPX: The Fed is now “collaring” the market Since the global financial crisis the Fed has been well known for providing a put option by its willingness to step in during periods of market stress. However, post the Fed meeting last week, it appears the central bank has decided to cap its monetary support as some FOMC members seem worried that financial conditions are too loose. Effectively, the market is now “collared” (more so for the SPX compared to EM) as the downside is protected by the Fed put (though with a lower strike price) while the upside is capped by log-jammed fiscal policy and positioning, where the risk of quant funds selling record equity positions meets cashed-up investors still accustomed to buyingthe-dip. The depressed implied China vs. US risks should reverse With the steep drop in global risk premium, the HSCEI-SPX 18-month variance swap spread has fallen back to the lower-end of its 5-year trading range. Since we believe the global synchronized monetary tightening will impact HSCEI volatility more than SPX volatility, we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points, a 3 vol point discount to vanilla variance spreads. Investors will be exposed to the realized vol spread between HSCEI and SPX as long as HSCEI stays within 70-110% of its initial level. Pricing of corridor variance is cheaper than vanilla variance as investors can avoid paying for the rich HSCEI convexity below the 70% barrier. The trade has a positive carry and benefits during China risk-off events. Note that the potential HSCEI index enhancement will reduce the financial weightings in HSCEI from 70% to 50% and lower realized volatility by 1.8 vol points. However, the enhancement will be implemented in stages. It will probably start in Dec-17 at the earliest and will not be fully implemented by the end of 2018, in our view. Indicative pricing (As of 19-Jun-17) Buy HSCEI-SPX Dec-18 70/110% corridor variance swap: 5 vol points 16 Global Equity Volatility Insights | 20 June 2017 Chart 24: The HSCEI-SPX Dec-18 (18-month) variance swap spread is back to the lower-end of its 5-year trading range 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Source: BofA Merrill Lynch Global Research Data as of 2-Jan-12 to 16-Jun-17 18-month constant maturity variance swap spread is used as a proxy of Dec18 variance swap spread Sep-15 Jan-16 May-16 Dec18 HSCEI SPX Variance Spread Sep-16 Jan-17 May-17 Chart 25: The long term HSCEI-SPX realized vol spread has been higher than the current implied corridor variance spread (5%) 98% of the time since 2007 30% 25% 20% 15% 10% 5% 0% Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16 Nov-16 Jun-17 Source: BofA Merrill Lynch Global Research HSCEI - SPX 18-month realized vol Dec18 Variance Implied: 8% Dec18 70/110% Corridor Variance Implied: 5% Data as of 2-Jul-07 to 16-Jun-17 Chart 26: Historical payoff of buying HSCEI-SPX Dec-18 70/110% corridor variance spread; higher payoffs during 2011-2012 and 2015 sell-offs 300,000 250,000 200,000 150,000 100,000 50,000 - -50,000 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Table 6: The HSCEI-SPX Dec-18 70/110% corridor variance trade has a positive carry with realized vol across most tenors higher than the current implied corridor variance swap spread HSCEI SPX Spread 1M realized vol 12.1% 4.6% 7.5% 3M realized vol 13.7% 6.8% 6.9% 6M realized vol 14.0% 6.8% 7.2% 12M realized vol 16.6% 9.7% 6.9% 18M realized vol 20.8% 11.99% 8.8% HSCEI – SPX Dec18 70/110% corridor variance offer: 5.0% Source: BofA Merrill Lynch Global Research HSCEI-SPX Dec18 70/110% corridor historical payoff (10k vega) Source: BofA Merrill Lynch Global Research Data as of 2-Jul-07 to 16-Jun-17 Global Equity Volatility Insights | 20 June 2017 17 Notable trends and dislocations (Asia) Most regions in Asia reported modest declines last week, led by Hong Kong’s HSCEI, which lost 2.0% week-over-week. Much of the decline came on Thursday following the US Fed’s decision to hike rates 25bps. Also in China, the People’s Bank of China (PBOC) injected 410bn yuan (about $60bn) into the financial system via reverse-repos, the largest cash boost since January. The central bank said the funds are meant to ease concern amid a seasonal funding squeeze. The biggest contributors to the index’s loss were financials names, including China Life Insurance (2628 HK), which fell 5.7%, Ping An Insurance Group Co of China Ltd (2318 HK), which dropped 3.7%, Bank of China Ltd (3988 HK), which declined 1.8%, and China Merchants Bank Co Ltd (3968 HK), which fell 5.7%. We saw a similar decline from Hong Kong’s HSI index, which lost 1.6% percent last week. After the HSCEI and HSI, last week’s biggest losers were Korea’s KOSPI and India’s NIFTY, which each returned -0.8% week-over-week. In Japan, the Nikkei fell 0.3%. On Friday, the Bank of Japan (BoJ) left its monetary policy unchanged—it will continue to control the yield curve via its negative benchmark rate and its asset purchasing program. The final region to report a loss last week was Taiwan’s TWSE, which lost 0.4%. On the other hand, the only region to see a gain last week was Australia, which saw its ASX 200 benchmark increase 1.7% week-over-week. The biggest contributors to the gain were Commonwealth Bank of Australia (CBA AU), which gained 3.4%, Westpac Banking Corp (WBC AU), which increased 1.9%, and CSL Ltd (CSL AU), which added 2.9%. 10 day realized vol picked up in Asia last week, up 2.0 vol points to 9.6% • Asian 3m ATM volatility declined on average 0.1 vol point to 12.3% last week, while 10 day realized vol increased on average 2.0 vol points to 9.6%. Notably, the HSI's realized vol increased 5.4 vol points, the biggest increase in the region. On the other hand, the NKY was the only index to see a decline in 10 day realized vol—it dropped 4.3 vol points week-over-week to 7.2%. • On average, term structures among Asian indices steepened by 0.2 vol points to 4.2% last week. The TWSE 12M-1M term structure steepened the most, increasing 1.0 vol point to 2.9%. On the other hand, Hong Kong’s HSI saw the only flattening as its term structure flattened 0.1 vol point to 4.9%. • Asian 3M 90-110% skews widened 0.5 vol points on average to 3.8%. Taiwan’s TWSE widened the most, increasing 2.3 vol points to -0.2%. Table 7: Volatility measures of major Asian indices (data as of 16-Jun-17) 3Mth ATM Implied Volatility 10D Realized Volatility 12Mth-1Mth ATM Vol Spread 3Mth 90-110 Skew Spread Equity Market Weekly 4Yr Weekly 4Yr Weekly 4Yr Weekly 4Yr Weekly Current change percentile Current change percentile Current change percentile Current change percentile return HSI 12.4% 0.2% 2.1% 10.2% 5.4% 20.6% 4.9% -0.1% 97.8% 3.3% 0.9% 41.4% -1.6% HSCEI 15.0% -0.4% 0.0% 10.7% 4.8% 7.8% 5.4% 0.2% 98.1% 1.4% 0.5% 36.5% -2.0% NKY 13.8% -0.2% 0.1% 7.2% -4.3% 1.8% 5.8% 0.5% 99.9% 5.8% 0.0% 73.9% -0.3% KOSPI 200 12.2% 0.2% 19.7% 11.1% 1.1% 53.1% 4.0% 0.2% 77.0% 3.8% 0.3% 43.7% -0.8% ASX 200 11.8% -0.2% 17.7% 15.7% 5.1% 77.1% 2.7% 0.0% 59.5% 6.4% -0.1% 22.5% 1.7% NIFTY 10.7% 0.2% 2.2% 4.8% 1.0% 0.4% 4.0% 0.0% 76.1% 5.9% -0.1% 64.1% -0.8% TWSE 10.5% -0.6% 7.2% 7.8% 1.0% 20.3% 2.9% 1.0% 71.2% -0.2% 2.3% 3.9% -0.4% Source: BofA Merrill Lynch Global Research 18 Global Equity Volatility Insights | 20 June 2017 Chart 27: Both HSCEI and NKY term structures are near record steeps; we favor calendar puts to hedge downside risks 15% 10% 5% 0% -5% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 NKY 3M-12M ATM Vol Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 HSCEI 3M-12M ATM Vol Jan-17 Calendar puts are attractively priced given the steep term structure With the continuous low realized volatility environment, both NKY and HSCEI 3-month minus 12-month term structures steepened to -3.7 vol points, which are near multi-year lows. As our strategists think the Fed now appears concerned about surging asset prices, investors should consider downside hedges. Calendar puts, i.e. buying short-dated ATM puts and selling long-dated OTM puts, are attractively priced given the steep term structure. Currently, we still have an open trade on NKY calendar puts (buy Jul-17 19,500 puts vs sell Dec-17 17,500 puts) to hedge downside risks. Source: BofA Merrill Lynch Global Research Data as of 2-Jan-09 to 16-Jun-17 Chart 28: The Nikkei/Topix ratio and its volatility is capped with the BoJ’s ongoing yield curve control NKY / TPX Price Ratio 12.9 12.7 12.5 12.3 12.1 11.9 11.7 11.5 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 NKY/TPX Ratio 10Y JGB Yield -0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1 1.2 JGB 10-year yield (Inverted) The BoJ’s ongoing yield curve control has capped the Nikkei/Topix ratio and its volatility Japanese government bond (JGB) yield has been on a downward trend over the last few years and has negatively impacted bank earnings. As the Topix has higher weightings in banks than the Nikkei, the NKY/TPX ratio has been grinding higher. However, the NKY/TPX ratio appears to have flattened out since the BoJ’s commitment to maintain the 10-year JGB yield at around 0% in September 2016. With global central banks increasingly advocating tighter monetary policies, the market may start to speculate BoJ’s exit strategy and this may reverse NKY/TPX’s upward trend. With TPX vol trading below NKY vol, buying TPX calls funded by NKY calls may perform well in such a scenario. Source: BofA Merrill Lynch Global Research Data from 2-Jan-12 to 16-Jun-17 AS51 3M ATM IV over HSCEI is at its 4-year high Table 4 lists Asian index pairs with the highest IV ratio vs their 4-year histories. For instance, the ratio of AS51 3M ATM IV over HSCEI is at its 4-year high. Global Equity Volatility Insights | 20 June 2017 19 Chart 29: The ratio of AS51 3M ATM IV over HSCEI is at its 4-yr high (Daily data from 1-Oct-12 through 16-Jun-17) Implied Vol 45% 40% 35% 30% 25% 20% 15% 10% 5% Jan-13 AS51 3M ATM vol HSCEI ATM vol Vol ratio May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 0.90 0.80 0.70 0.60 0.50 0.40 Ratio Table 8: Index pairs^ with the highest implied vol ratio vs their histories (data as of 16-Jun-17) Index A Index B A/B Implied Ratio 4-yr percentile (Implied vol) (Implied Vol) Vol ratio 3M ATM AS51 (11.8%) HSCEI (15.0%) 0.79 100% 6M ATM KOSPI2 (13.2%) HSCEI (17.1%) 0.77 98% 12M ATM KOSPI2 (14.6%) NIFTY (14.0%) 1.04 98% 3M 25d-Put AS51 (13.8%) HSCEI (16.3%) 0.85 99% 6M 25d-Put KOSPI2 (14.4%) HSCEI (18.7%) 0.77 98% 12M 25d-Put KOSPI2 (16.0%) HSCEI (20.5%) 0.78 99% 3M 25d-Call AS51 (10.9%) HSCEI (15.0%) 0.73 99% 6M 25d-Call KOSPI2 (12.8%) NKY (14.4%) 0.89 98% 12M 25d-Call KOSPI2 (14.2%) NIFTY (12.2%) 1.16 98% Source: BofA Merrill Lynch Global Research ^ Index universe includes the ASX200, HSCEI, HSI, KOSPI2, NIFTY, NKY, TWSE, SPX and SX5E * mid level implied vol Source: BofA Merrill Lynch Global Research 20 Global Equity Volatility Insights | 20 June 2017 Summary of Open Trades (19-Jun-17) Price data for open level reflects the price on open date and does not necessarily reflect the price at which the trade could be executed at the date of this report. Our trades are structured to be executed on the open date and are not necessarily appropriate to execute as formulated beyond that date. Table 9: Summary of open trades as of 19-Jun-17 Trade Description Open Date Open Level Long SX5E vs short SPX Dec18 var swap 5-Jul-16 6.1 vols Long NKY vs short SPX Dec18 var swap 5-Jul-16 5.7 vols Long SX5E vs short SPX Dec18 put vs put 5-Jul-16 0.00% Expected Trade Term Dec-18 expiry Rationale Investors should re-assess attractiveness of popular and (typically) technically motivated longerdated RV vol trades, given environment of structurally higher political & economic risks and increasingly limited policy options Buy a 1Y ATM worst-of call on SPX & TLT 18-Jul-16 0.9% 1 year Cheap equity upside in a bond / equity melt-up Buy SPX>UKX Jun17 ATM outperformance call, conditioned on SPX lower at maturity (qUSD) Buy UKX Jun17 6650 put, sell SPX Jun17 1850 put Buy an SX5E Sep-17 95% put conditional on EUR 10Y CMS > 1.1% or < 0.3% in Mar-17 17-Oct-16 17-Oct-16 2.0% 2.6% Jun-17 expiry Jun-17 expiry Risks of a hard Brexit rising and (weak) currency tailwind likely to prove short-lived; position cheaply for FTSE 100 (UKX) underperformance 14-Nov-16 2.7% Sep-17 expiry Remain long equities and cheapen hedges by conditioning on rates Buy 2823 HK Jun-17 90/110 strangle 21-Nov-16 5.55% Jun-17 expiry China risk premium rising but A-shares vol still at all-time lows Buy ESTX50 Dec17 90% put contingent on EURGBP < 0.82 by Jun17 expiry 2-Dec-16 1.63% Dec-17 expiry Buy SPX>UKX Jun17 5% outperformance call (qUSD) 2-Dec-16 2.05% Jun-17 expiry Long XLF vs SX7E Jun17 ATM outperf call, contingent on SX7E higher at Jun expiry (qEUR) 2-Dec-16 1.20% Jun-17 expiry Equity-FX correlation is not priced for a spillover of populism into the EU, which could cause EUR to fall against an already weakened GBP as equities fall UKX is heavily exposed to EU (50% revenues) and should underperform SPX if GBP tailwind fades. Volatility & correlation suit well for outperformance Cheapen long XLF upside to near 8y lows via selling upside on structurally challenged European banks & relatively more bearish outlook for US rates vs EU Buy NKY Jun17 110% Call 02-Dec-16 1.83% Jun-17 expiry USDJPY and NKY the biggest beneficiaries of a Trump win Buy TPINSU Jun17 110-125% Call Spread 02-Dec-16 3.30% Jun-17 expiry Banks and Insurance are the most leveraged sector Buy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% Jun-17 expiry Banks and Insurance are the most leveraged sector Buy 2823 HK Jun17 90/110% strangle 02-Dec-16 5.90% Jun-17 expiry China risk premium rising but A-shares vol still at all-time lows Buy HSCEI Jun17 105-120% call spread contingent on $KRW >1200 02-Dec-16 1.20% Jun-17 expiry Own contrarian EM upside at low cost & limited risk Buy NKY-SPX Dec19 70/110% corridor variance 02-Dec-16 1.50% Dec-19 expiry QE uncertainty and USDJPY vol support NKY vs SPX realized vol Buy NKY Jun17-Jun18 18,500 strike FVA 02-Dec-16 21.5% Jun-17 expiry What if QE hits its limit? Long NKY vol outright which is cheap to carry Long Russell 2000 vs. short S&P 500 Dec-18 var spread 5-Dec-16 3.9pts Dec-18 expiry With fiscal stimulus and potential tax cuts, small caps revert to old normal generating higher vol on upside and downside relative to large caps Buy 1x Jun17 64 call on Aug17 Brent futures, sell 1x SXEP Jun17 330 call 9-Jan-17 1.00% Jun-17 expiry Vol and price technicals are attractive. BofAML commodity strategists oil target is $70/bbl but this is already priced in SXEP levels according to BofAML Oil & Gas equity analysts Buy SPX 6m ATM call contingent on GLD 5% higher in 3m 23-Jan-17 1% Jul-17 expiry Position for a near-term wobble followed by yet another equity melt up Long NKY - SPX Dec-18 corridor var replication 13-Feb-17 4.00% Dec-18 expiry Cheaply access positive carry QE failure hedge Buy NDX Top20 volatility dispersion 27-Feb-17 17.0% Jan-18 expiry Long 1.8x vega on 1y single stock vols of UK Brexit exposed names, Short 1x vega on 1y FTSE index vol 14-Mar-17 32.3vols 14-Mar-18 Position for a pick-up in single stock realised vol on the 10 names (within FTSE’s top 30) where post EU referendum realised vol was the highest relative to current 1y ATMf vol. The 10 names are: Barclays, Aviva, Prudential, BT, Glencore, Tesco, CRH, BA, Standard Chartered & HSBC. SPX Sep-17 95% puts conditional on the 5yr CMS rate above 2.4% at maturity 14-Mar-17 1% Sep-17, expiry Hedge portfolios against a buy-the-dip failure should a faster rate cycle ultimately jeopardize it Buy Buy-Rated MSCI A-shares stocks & hedge with puts 23-Mar-17 1.44% Jun-17 expiry Market may trade on the MSCI inclusion theme; Hedge with 2823 HK Jun17 95% put Buy A-shares with highest MSCI impact & hedge with put 23-Mar-17 1.44% Jun-17 expiry Market may trade on the MSCI inclusion theme; Hedge with 2823 HK Jun17 95% put Own Japan stock vol via gamma weighted vol dispersion 10-Apr-17 15.8% Mar18 expiry Historically attractive to own TOPIX Top 10 corridor gamma weighted volatility dispersion Buy CNOOC Jul-17 95% puts vs. sell HSCEI 95% puts 24-Apr-17 0.77% Jul17 expiry Hedge a rollover in China GDP and screen for cyclicals that could face pressure Buy CH Merchant Bk Jul-17 18.5/17 put spread vs 22 call 24-Apr-17 0.10% Jul17 expiry Hedge a rollover in China GDP and screen for cyclicals that could face pressure Buy SX5E Dec17 3800 calls contingent on EURUSD > 1.1 at expiry 8-May-17 1.3% Dec17 expiry Benefit from low vol, flat correl, likely hawkish ECB & (FX un-hedged) inflows into EU equities Buy 1.5x KOSPI2 285 puts vs. short 1x $KRW 1160 call 8-May-17 0.3% Jul17 expiry Leverage inexpensive equity vs. FX vols to own cheap tail protection Buy EEM Aug17 39.5 put and sell EEM Aug17 37 put 15-May-17 1.6% Aug17, expiry Buy inexpensive EM equity puts on near-record performance gap to commodities Buy Dec17 105% call on an equally weighted basket of SX7E, SXAP, SXPP & SXEP, sell Dec17 ATM worst-of call on the same 15-May-17 1.6% Dec17 expiry Monetise low vol & high implied correl to position for greater sector dispersion in EU: long basket call, short worst-of call Buy NKY Jul-17 19500 puts vs. short Dec-17 17500 puts 15-May-17 0.0% Jul17 expiry Own inexpensive NKY hedges into FOMC; Term structure is too steep is under-pricing risks Short GILD $55-$62.5-$67.5 put spread collar 16-May-17 1.5% Sep-17 expiry Buy out-of-favour and inexpensive biotech upside by levering depressed vol & skew Long 1x EEM 3m 97.5% put vs. short ~0.09x units each of 3m 97.5% puts on FXI, EWY, EWZ, EPI, EWT, RSX, EZA, and EWW 1.5% 0.0% 3m Buy EEM puts financed by a basket of EM puts to lever near record low correl Buy Tencent Jul17 250/300 strangle 22-May-17 2.45% Jul-17 expiry Hedge a potential China tech bubble; Tencent potentially volatile after a 45% rally YTD Buy A-shares (2823 HK) Jul17 105% call 22-May-17 1.15% Jul-17 expiry Hedge the upside into MSCI announcement on 20-Jun Buy 1x contract of ESTX50 Jun17 3525, sell 4x contracts of V2X Aug future 22-May-17 1.00% Buy SX5E Dec17 3450-3700 bullish risk reversal vs short IBOXX HY TRS with equal notional sizing 30-May-17 1.17% Jun-17 expiry Dec-17 expiry Fundamental case to be long EU equities remains intact but stretched bullish positioning could lead to near-term consolidation BofAML Equity & Credit strategists highlight they favour equities over HY credit as div yields have surpassed HY credit yield & equities offer more gearing to rising PMI’s, earnings and FCF Global Equity Volatility Insights | 20 June 2017 21 Table 9: Summary of open trades as of 19-Jun-17 Trade Description Buy 6m ATM calls on FB, AMZN, NFLX and GOOGL Open Date Open Level 6.9% (FB), 7.2% (AMZN), 30-May-17 9.4% (NFLX), 6.2% (GOOGL) Expected Trade Term 6m Rationale Stock replace FANG stocks Buy a 6m outperformance call on FANG stocks vs. SPX conditional on SPX> 30-May-17 3.4% 6m Lever extremely depressed FANG volatility and low correlation to buy upside current levels at expiry Buy HSI Sep17 90% put, sell ASX200 Sep-17 90% put 30-May-17 0.15% Sep-17 expiry HSI is unlikely to outperform if AS51 drops more than 10%; HSI vol below AS51 vol Buy 14-Sep-17 best-of 95% put on NKY/KOSPI2/HSI 05-Jun-17 0.80% Sep-17 expiry Buy best-of puts to hedge a reversal in rally with the low vol and correlation environment Buy SPX Top50 volatility dispersion 05-Jun-17 16.6% Jun-18 expiry Position for a potential bubble in Tech Buy XLF 24 call, sell QQQ 139 call 12-Jun-17 0.01% Jul-17 expiry Rotate out of Growth into Value Buy NKY-KOSPI2 Dec-17 90/110 strangle spreads 12-Jun-17 3.50% Dec-17 expiry We think the technically depressed NKY-KOSPI2 volatility spread will normalize Buy NKY Sep17 19000-17500 put spread 12-Jun-17 0.93% Sep-17 expiry NKY put spread may offer even better value in hedging against a "mini TARP moment" Source: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”. 22 Global Equity Volatility Insights | 20 June 2017 Summary of Closed Trades (19-Jun-17) Table 10: Summary of closed trades as of 19-Jun-17 Open Open Close Trade Description Date Level Level Close Date Rationale Buy NKY Aug-16 105%-110% call spreads & sell 90% puts 11-Jul-16 0.26% 1.73% 25-Jul-16 Close position as the hurdle to surprise on the upside is high following a 5.8% NKY rally Replace FB long positions via Oct-16 ATM calls 25-Jul-16 5.9% 6.1% 1-Aug-16 Close position as Facebook rallied on better-than expected Q2 results Replace AMZN long positions via Oct-16 ATM calls 25-Jul-16 5.5% 6.3% 1-Aug-16 Close position as Amazon rallied on better-than expected Q2 results Buy AAPL Oct-16 ATM protective puts 25-Jul-16 4.6% 1.2% 1-Aug-16 Remove protection as worries around disappointing Q4 guidance faded post earnings Buy 1.5x 5-Aug-16 2950-3000 strangles by selling 1x 19- Aug-16 2950-3000 strangles 25-Jul-16 0.00% -1.12% 5-Aug-16 The BoJ, Fed & EU bank stress tests could move mkts sharply in the near term Sell NKY Aug16 15500 puts, Buy Sep16 15500-14500 put spreads 25-Jul-16 0.24% 0.28% Aug-16 expiry & Sep-16 expiry Unwinding before the Aug16 expiry; The NKY Sep put spread has carried well Buy TLS 25-Aug16 95% puts 18-Jul-16 1.05% 2.95% 15-Aug-16 Telstra has announced earnings and the stock has corrected 5% over the period Buy Newcrest 25-Aug-16 105/115% call spreads 18-Jul-16 2.64% 1.18% 15-Aug-16 NCM has stayed unchanged over the period despite better than expected earnings Buy CSL 25-Aug-16 95% puts 18-Jul-16 1.09% 1.18% 22-Aug-16 CSL fell 5.4% over the period with weak earnings announcement Buy BHP 25-Aug-16 105/115% call spreads 18-Jul-16 2.22% 0.77% 22-Aug-16 BHP rose 3.6% over the period but the option remains out of the money Buy HSCEI Aug16 9400 call, Short Oct16 10000 call 1-Aug-16 0.00% 0.67% 22-Aug-16 Close position as the HSCEI rallies 5.2% and we are approaching the Aug16 expiry Buy Tencent (700 HK) Sep16 105% call 15-Aug-16 1.70% 2.70% 22-Aug-16 Tencent jumped post better than expected earnings Sell 1x SX7E 1M 25d call to fully finance 1.85x SX5E 1M 25d calls 25-Jul-16 0.0% 0.0% 25-Aug-16 SX7E 1M 25d call / SX5E 1M 25d call price ratio is in the 100 th 2-yr percentile Buy CMB (3968 HK) Sep16 105-115% call spread 5-Jul-16 2.32% 6.12% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-term Buy ICBC (1398 HK) Sep16 105-115% call spread 5-Jul-16 2.12% 9.0% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-term Buy BOC (3988 HK) Sep16 105-115% call spread 5-Jul-16 2.10% 6.28% 30-Aug-16 Close position and BofA ML turned neutral in EM in the short-term Buy XLF Sep 24 strike call 25-Jul-16 1.4% 2.3% 6-Sep-16 Buy XLU Sep 51 strike put 25-Jul-16 1.3% 2.6% 6-Sep-16 Buy a 6M ATM worst-of {XLF call, XLU put} 25-Jul-16 1.35% 3.0% 6-Sep-16 Buy 0.85x SX5E Sep16 3000-3100 strangle, sell 1x SX5E Dec16 3000-3100 strangle Close positions from trades that have benefited thus far from the rally in Financials and weakness in Utilities; monetize view that Fed will not hike in September 15-Aug-16 -5.07% -5.73% Sep-16 expiry Take advantage of low near term vol and a steep term structure Long 0.5x V2X Oct16 future, short 0.5x V2X Jan-17 future 11-Jul-16 0.05 vols -0.95 vols 19-Sep-16 Unwind Oct/Jan spread and maintain Nov/Jan spread given clarity around the Italian referendum date Sell VSTOXX Sep 21 puts 30-Aug-16 1.20 vols 1.77 vols Sep-16 expiry Global macro event risk likely to keep V2X supported going into Sep expiry VIX Sep 17/22 1x2 call ratios (short 2x) + 0.75x SPY Sep23 15-Aug-16 210 puts $0.85 $0.45 Sep VIX expiry Trade provided hedging benefits during the sudden Sep market shock & has expired Buy NKY Oct 95/105 strangle outright 30-Aug-16 2.28% 0.44% 27-Sep-16 Take a loss post an disappointing market reaction on the BoJ announcement Buy NKY Oct 95/105 strangle daily delta-hedging 30-Aug-16 2.28% 0.56% 27-Sep-16 Take a loss post an disappointing market reaction on the BoJ announcement Long 3M 25d EFA put vs short 3M 25d UKX put 5-Jul-16 0.00% 0.00% 3 months Trade expired on 3-Oct Replace T long position via 3M ATM calls 19-Jul-16 2.72% 0.04% 3 months Replace LOW long position via 3M ATM calls 19-Jul-16 3.90% 0.00% 3 months Replace RTN long position via 3M ATM calls 19-Jul-16 3.16% 0.41% 3 months Replace CRM long position via 3M ATM calls 19-Jul-16 4.16% 0.19% 3 months Replace NEE long position via 3M ATM calls 19-Jul-16 2.32% 0.08% 3 months Overlay long WBA long position with 3M ATM calls 19-Jul-16 4.04% 1.20% 3 months Our analysts no longer expect impactful catalysts in the near term; stock replacement strategies proved useful in cushioning downside losses during the abrupt Sep-16 sell-off vs. long equity positions. Buy HKEx (388 HK) 1x2 105%-115% call ratio 15-Aug-16 0.60% 0.00% 29-Sep-16 HKEx failed to rally above the first call strike and expired worthless Buy NKY Oct16 17500 call, Sell 0.65x NKY Sep 17250 call 8-Aug-16 0.70% 0% 14-Oct-16 NKY Oct-16 call expired out of the money Close position as the Oct VIX future stayed well-supported as is typically the case in the weeks 1-Aug-16 $0.45 $0.88 14-Oct-16 Short VIX Oct 15 put vs. long VIX Nov 19/26 call spread leading up to the US presidential election Long 2x SPX Oct31 2125 puts vs. short 1x SPX Mar-17 1975 put 6-Sep-16 0.0% -0.34% 14-Oct-16 Provided hedging benefits in the sudden equity shock in early Sep-16; now being unwound to mitigate decay DAX +2.31x Dec16 / -1x Dec17 put calendars 30-Aug16 0.00% -2.60% Dec-16 expiry DAX outperformance & low short dated DAX vol make put calendars attractive Buy SX5E Dec16 2950/2750 put spread 6-Sep-16 1.48% 0.00% Dec-16 expiry A catalyst-strewn fall and a remarkably low volatility summer suggests that there could be headwinds to continued market upside on low volatility Buy 1.5x SX5E Dec16 3100 call, sell 1x SX5E Mar17 3100 24-Oct-16 call for an upfront credit of 56bps -0.56% 1.62% Dec-16 expiry Monetise steep SX5E vol curve for tactical EU upside with an upfront credit Buy a 6M ATM worst-of call on XLP & GLD 11-Jul-16 1.05% 0.0% 6 months Buy a 6M ATM worst-of {SPX put, GLD call} 11-Jul-16 1.60% 0.0% 6 months Buy GLD 124/130 Dec-16 call spread 8-Nov-16 0.9% 0.0% Dec-16 Buy GLD 116/124/130 Dec-16 call spread collar 8-Nov-16 0.65% -7.4% Dec-16 Buy TLT 123/132/137 Dec-16 call spread collar 8-Nov-16 0.67% -5.03% Dec-16 Buy Oct16 110%f calls on VIE FP, AI FP, IBE SQ, STAN LN 18-Jul-16 and MUV2 GY 2.37% 3.30% Oct-16 expiry Buy an Oct16 110%F call on an equally weighted basket (quanto EUR) 18-Jul-16 0.81% 0.00% Oct-16 expiry Take a loss as safe-haven assets post a weak performance in H2-16 with fears over Trump’s surprise victory easing and stock markets rallying Add exposure via inexpensive upside on single names where positioning appears particularly bearish and stocks have underperformed vs. their sectors Buy 0.895x V2X Oct 21 puts, sell 1x VIX Oct 16 puts 19-Sep-16 0.0 $1.3 Oct-16 expiry Near term catalysts & curve differentials favour tactical long V2X, short VIX puts Sell SX7E Dec16 115 call 6-Sep-16 -0.88% -1.09% 24-Oct-16 Close short SX7E call (part of SX5E put spread, short SX7E call trade) to limit potential risk from a “Yes” in the Italian referendum Global Equity Volatility Insights | 20 June 2017 23 Table 10: Summary of closed trades as of 19-Jun-17 Open Open Close Trade Description Date Level Level Close Date Rationale Buy HSI Oct-16 102% call, Sell HSP 105% call 19-Sep-16 0.60% 0.00% 28-Oct-16 HSP has under-performed HSI by 1.8% but both options expire out-of-the money Short 1x USO 3M 25d put, long 2.1x SXEP 3M 25d call 8-Aug-16 0.00% 0.00% 4-Nov-16 The number of long SXEP calls per short USO put is historically high. Leverage commodity and equity strategists' views on oil and the Oil & Gas sector Sell Dec16 SXDP 635 puts, buy 0.6x Dec16 SX7E 110 calls 7-Nov-16 0.00% 1.23% 11-Nov-16 Tactical option trade ahead of US elections Long 0.5x V2X Nov16 future, short 0.5x V2X Jan-17 future 11-Jul-16 0.20 vols -1.19 vols Nov-16 expiry Hedge further Brexit fallout, Italian bank & referendum risk. Buy NIFTY Nov16 95/105 strangle outright 6-Sep-16 1.63% 6.36% 21-Nov-16 Close position as NIFTY has fallen 11.4% and we are approaching the expiry Buy H-shares w/ SZ-A & buy HSCEI Dec16 put 22-Aug-16 1.90% 8.72% 5-Dec-16 Close position as the Shenzhen HK connect has launched on 5-Dec-16 Buy HK small-cap & buy HSCEI Dec16 put 22-Aug-16 1.90% 6.76% 5-Dec-16 Close position as the Shenzhen HK connect has launched on 5-Dec-16 Buy 1.32x EFA US 3M 25d put, sell 1x SX5E 3M 25d put for 22-Aug-16 near 0 upfront premium 0.04% 0.00% 22-Nov-16 Buy 2.6x SX5E 3M 110% call, sell 1x SX5E 3M 90% put for near 0 upfront premium Own EFA puts vs ESTX50 puts to benefit from any increase in quantitative failure risk in Japan and post-Brexit uncertainty 22-Aug-16 -0.04% 0.00% 22-Nov-16 Low vol, high skew combo makes ESTX50 levered riskies attractive Sell 1M 95%f SX5E put and buy 1M 105%f SX5E call 31-Oct-16 -0.40% 0.00% 1-Dec-16 Generate income in range-bound markets, benefiting from high ESTX50 skew Buy KOSPI2 Dec16 95% put, sell $KRW 97.4% put 17-Oct-16 0.00% 0.00% 8-Dec-16 Both legs expire out-of-the money at expiry Buy HSCEI Dec16 95% put, sell 2822 HK 94.8% put 12-Sep-16 0.00% 0.00% 29-Dec-16 Both legs expire out-of-the money Buy HSCEI Dec-16 105-115% call spread 27-Sep-16 1.82% 0.00% 29-Dec-16 HSCEI call spread expires out-of-the money Buy CH Banks Dec-16 105-115% call spread 27-Sep-16 2.05% 0.00% 29-Dec-16 Chinese Banks call spread expires out-of-the money Buy Best-of TWSE,KOSPI2,HSCEI Dec16 95% put 10-Oct-16 0.90% 0.00% 29-Dec-16 The best performing index (KOSPI2) fell less than 5% over the period Buy HSCEI Dec16 9800 call with a 10600 knock-out 7-Nov-16 1.00% 0.00% 29-Dec-16 HSCEI knock-out call expires out-of-the money Sell Samsung Jan17 90% put, buy KOSPI2 96% put 17-Oct-16 0.00% 0.00% 12-Jan-17 Both legs expire out-of-the money. The relative value trade has a zero profit & loss Buy an XOP Jan-17 45 call 22-Aug-16 1.4% 0.00% 20-Jan-17 Call expired out-of-the money at expiry Buy an XLE Jan-17 ATM call with 115% knock-in 22-Aug-16 2.5% 0.0% 20-Jan-17 Call expires in-the-money but the barrier was not breached at expiry Buy an XLE over SPX Jan-17 ATM outperformance call contingent on SPX up at expiry 22-Aug-16 2.3% 3.4% 20-Jan-17 Energy equity outperformed the overall equity market while both were up by the time the outperformance call expired Buy XLP Jan-17 52 / 49 put spread 19-Sep-16 1.4% 0.00% Jan-17 expiry Both legs expire out-of-the money Buy a 6M ATM best-of put on SPX & TLT 18-Jul-16 0.8% 0.00% 6 months Put expired out-of-the money as the S&P500 ended Buy LLY Jan-17 80/90 1x2 CS 17-Oct-16 1.8% 0.00% Jan-17 expiry Both legs expire out-of-the money Buy LLY Jan-17 80/85 CS with 90 KI on upper leg 17-Oct-16 2.4% 0.00% Jan-17 expiry Both legs expire out-of-the money Buy ZTS Jan-17 46/50 bullish risk reversal 17-Oct-16 2.6% 7.4% Jan-17 expiry Both legs expire in-of-the money Buy ZTS Jan-17 46/50/55 call spread collar 17-Oct-16 1.4% 7.4% Jan-17 expiry The 46 call and 50 call expire in-the-money Buy an EWZ Jan-17 40 call 24-Oct-16 3.1% 0.00% Jan-17 expiry Call expired out-of-the money at expiry Buy TPINSU 105-120% call spread, short 85% put 14-Nov-16 1.75% 4.50% 13-Jan-17 Option expired and Topix Insurance rose 9.5% over the period Buy TPNBNK 105-120% call spread, short 85% put 14-Nov-16 1.85% 10.60% 13-Jan-17 Option expired and Topix Banks rose 15.6% over the period Buy HSBC Jan-17 105% call, Sell HSP 105% call 14-Nov-16 0.52% 4.98% 26-Jan-17 Option expired; HSBC out-performed HSP on the upside Buy SX5E +Dec19/-Dec18 div future spread 4-Oct-16 €-7.0 €-4.2 6-Feb-17 Close position given sudden SX5E rally and Dec18 div future will lose equity beta Own Nifty Mar17 call to position for budget surprise 23-Jan-17 0.67% 2.15% 6-Feb-17 Nifty was up 4.9% over the period on the back of a positive budget announcement Buy HSI Feb17 23600 call 9-Jan-17 0.48% 1.09% 13-Feb-17 Close position. HSI was up 4.9% over the period Buy AMP AU 23-Feb-17 95% puts 30-Jan-17 1.85% 0.27% 13-Feb-17 Unwind the put option post the earnings result Buy SUN AU 23-Feb-17 95% puts 30-Jan-17 1.39% 0.08% 13-Feb-17 Unwind the put option post the earnings result Buy 1x V2X Feb17 19 calls, sell 0.85x V2X Mar17 futures 17-Jan-17 -16.1v -14.32v Feb-17 expiry Unwind as the Feb17 call expired Buy CBA AU 23-Feb-17 95% puts 30-Jan-17 0.76% 0.00% 21-Feb-17 Unwind the put option post the earnings result Overwrite WES AU 23-Feb-17 103% calls 30-Jan-17 -0.87% -1.20% 21-Feb-17 Unwind the put option post the earnings result Long V2X Apr future, short V2X May future 9-Jan-17 0.45 4.55 24-Feb-17 The Apr future has already richened significantly vs. the May future. Prefer V2X May long May call spread, short Apr put as a French election hedge instead. Buy 1x ESTX50 Dec17 3250 calls, sell 1.23x EURJPY Dec- 17 115 puts 5-Dec-16 0.00% 3.20% 24-Feb-17 Unwind ahead of French elections as political uncertainty can weigh on the EUR Buy NKY Dec17 19500 call, short Mar17 18000 call 3-Oct-16 0.58% -1.82% 3-Mar-17 Unwind the option before the Mar-17 expiry Buy NKY Mar17-Dec17 17000 strike FVA 3-Oct-16 20.2% 21.6% 3-Mar-17 Unwind the option before the Mar-17 expiry Buy TPNBNK Mar17 1x1.5 180/170 put ratio 9-Jan-17 0.60% 0.00% 10-Mar-17 Option expired out-of-the money as the TPNBNK remained range-bounded Buy ESTX50 17-Mar-17 3350-3450 strangle 6-Mar-17 0.80% 0.00% 17-Mar-17 Expired out-of-the-money Buy Volkswagen 2017 dividend future 17-Jan-17 €1.3 €2.0 14-Mar-17 Volkswagen announced a dividend of €2.05 on 14-Mar-17 Buy Mar17 UKX 6700 put cont. on GBPUSD<1.20 10-Oct-16 0.81% 0.0% 17-Mar-17 Buy Mar17 UKX<6700 / GBPUSD<1.20 dual digital 10-Oct-16 9.1% 0.0% 17-Mar-17 UKX rallied making the hedges expire out-of-the-money Mar17 UKX 6700 buy qUSD put, sell 0.9x vanilla put 10-Oct-16 0.44% 0.0% 17-Mar-17 Buy 6M ATM worst-of {XLF call, XLU put} 19-Sep-16 1.38% 0% 17-Mar-17 While XLF has rallied ~30% since inception, XLU is higher by 4% and the XLU put is the worst performing option, expiring OTM Buy an SPX Mar-17 97.5% put contingent on USO>105% at 3-Oct-16 expiry 1.08% 0% 17-Mar-17 The structure offered a deep discount for an SPX hedge and expires OTM as markets have rallied strongly Buy a USO Mar-17 105% call contingent on SPX<97.5% at 3-Oct-16 expiry 1.70% 0% 17-Mar-17 The trade expires OTM due to the SPX rally and a sell off in oil over the past two weeks Buy a Mar-17 SPX<97.5%, USO>105% dual digital 3-Oct-16 11.80% 0% 17-Mar-17 The trade expires OTM due to the SPX rally and a sell off in oil over the past two weeks Buy an IWM Mar-17 ATM call conditional on EEM<95% at 14-Nov-17 1.15% 0% 17-Mar-17 EEM has rallied 15% over the period together with IWM expiry Buy an XLI Mar-17 ATM call conditional on EEM<95% at expiry 14-Nov-17 0.89% 0% 17-Mar-17 EEM has rallied 15% over the period together with XLI Buy GLD Mar-17 116 call, sell Jun-17 127 call 23-Jan-17 1% 0.31% 17-Mar-17 While GLD rallied strongly earlier in the life of the trade, it recently retreated at the time of expiry with GLD 87bps above the lower strike, the short call is worth 56bps 24 Global Equity Volatility Insights | 20 June 2017 Table 10: Summary of closed trades as of 19-Jun-17 Open Open Close Trade Description Date Level Level Close Date Rationale Long 2x SPX Aug-17 2200 puts, short 1x SPX Aug-17 2350 21-Feb-17 put 0.10% 0.01% 17-Mar-17 SPX has traded range bound since inception of the trade, still the carry has been minimal, close out or roll the position Own Nifty Mar17 strangle heading into 5 events 23-Jan-17 1.50% 3.96% 20-Mar-17 Unwind the option post the state election event and Close position Long XLF Jun17 24 call, short SX7E Jun17 120 call 2-Dec-16 0.74% -5.88% 27-Mar-17 The call vs call relative value trade is now riskier given the potential reversal in US reflation trades and the potential for European equities to rally in a French election market-favourable outcome. Buy Tencent Mar-17 105% calls 27-Feb-17 1.15% 2.31% 27-Mar-17 Unwind the position for the Tencent earnings Buy HSCEI Mar17 105% call contingent SPX <2200 24-Oct-16 1.20% 0.00% 30-Mar-17 Option expired; HSCEI was up 5.1% but the SPX ended above 2200 Buy HSCEI Mar17 9600 put vs short Sep17 8200 put 17-Jan-17 -0.05% -0.78% 30-Mar-17 Unwind post Mar-17 expiry; the short Sep17 put helped reduce the hedging cost Buy HSCEI Mar-17 1x1.5 10800-11200 call ratio 21-Feb-17 0.57% 0.00% 30-Mar-17 Option expired; HSCEI stayed flat and failed to rally above the 10800 call strike Long SX5E Apr17 3300 call, short SX5E Dec17 3450 call 30-Jan-17 -0.60% -0.18% 21-Apr-17 Apr17 option expired so we unwind the entire trade as planned Short 1x SX5E May17 3350 calls, long 2x SX5E May17 3450 calls 21-Feb-17 0.00% 0.60% 24-Apr-17 Unwind before May expiry following the large 4% SX5E move on 24-Apr, given lack of near term catalysts Buy an SPX Apr-17 95% put conditional on US 10Y CMS > 14-Nov-16 2.5% at maturity 0.78% 0% 21-Apr-17 In Nov-16, we recommended remaining long equities with cheap hedges. The hedge expires out of the money, while SPX has returned 8.7% for the period Long SPX Apr17 2300 call, short SPX Dec17 2400 call 30-Jan-17 -0.80% -0.71% 21-Apr-17 The reflation trade has slowed down and the market is in a holding pattern. The long Apr-17 call expires in-the-money, and the short Dec-17 call still has time value Long VIX May 16 / 22 call spread vs. short VIX Apr 13 put 21-Feb-17 $0.35 $0.75 19-Apr-17 The call spread still has value due to elevated vol and vol-of-vol and we collect the premium on the expired short OTM put Short SPX 21-Apr-17 vs. long 28-Apr-17 2325 straddle pair 6-Mar-17 0.50% 1.06% 21-Apr-17 The trade benefited from the rise in post-event volatility relative to pre-event volatility Buy SX5E 28-Apr-17 3600 call 3-Apr-17 0.26% 0% 28-Apr-17 The option expired Buy Unicom Apr17 105-115% call spread 21-Feb-17 1.65% 4.25% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEI Buy Sands China Apr17 105-115% call spread 21-Feb-17 2.00% 6.97% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEI Buy Galaxy Apr17 105-115% call spread 21-Feb-17 2.10% 10.0% 27-Apr-17 Single stock option expired in-the-money despite a 1.4% decline in the HSCEI Buy SX5E Dec19 2500 put, sell SX5E Dec18 2500 put 27-Sep-16 3.97% 1.9% 8-May-17 SX5E has rallied 23.3% since we entered the trade and European political risk abated for now Buy KOSPI2 May17 103% calls 13-Mar-17 0.63% 5.37% 8-May-17 Option expired; KOSPI2 rallied 8.37% over the period Buy KOSPI2 May17 97/103% strangle 13-Mar-17 1.38% 5.37% 8-May-17 Option expired; KOSPI2 rallied 8.37% over the period Buy NKY Jun17 20750 call, sell 1-1.3x 18750-17750 put ratio 06-Mar-17 0.00% 0.00% 15-May-17 Closing the trade post French election; option strikes remain far from the spot level Long V2X May 26-32.5 call spread and short Apr 22 put 21-Feb-17 €0.20 €0.00 19-May-17 Expired Buy 1x contract of SX5E May17 3550 call, sell 5x contracts Expired of V2X May17 16 puts 3-Apr-17 0.0% -1.63% 19-May-17 Long GLD May 123 call vs. short May 130 call 21-Feb-17 0.8% 0.00% 19-May-17 The hedge expired out-of-the-money as S&P 500 remained supported Buy 1.5x EFA Jun17 103% call, sell 1x EFA May17 ATM call 6-Mar-17 -0.15% -0.20% 19-May-17 EFA rallied strongly leading into the second round of the French elections but subsequently stalled Buy SPX Top50 volatility dispersion 27-Feb-16 14.7% 11.5% 30-May-17 Expired Long HSI vs. SPX May-17 90% put switch 06-Feb-17 0.07% 0.00% 29-May-17 Option expired; Both HSI and SPX puts expire out-of-the-money Buy the Nifty May17 95/105% strangle outright 20-Mar-17 1.20% 0.00% 25-May-17 Option expired; Nifty failed to move more than the straddle huddle (5%) Long HSBC May-17 65/70 call spread 3-Apr-17 0.95% 4.33% 29-May-17 Option expired; HSBC is up 6.75% on the back of a strong seasonal rally Buy NKY Jun17 110% Call 02-Dec-16 1.83% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money Buy TPINSU Jun17 110-125% Call Spread 02-Dec-16 3.30% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money Buy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money Buy NKY Jun17-Jun18 18,500 strike FVA 02-Dec-16 21.5% 19.1% 9-Jun-17 Closing the trade on Jun17 expiry; Global volatility collapsed in 1H2017 Buy an EWZ Jun-17 40 call conditional on SPX<2200 at expiry 24-Oct-16 1.70% 0% 19-Jun-17 Recent political turmoil in Brazil surrounding Temer's presidency caused a slide in the Brazilian equity market and the BRL Buy SPX Jun17 95% put contingent on US 5Y CMS > 2.15 5-Dec-16 1.04% 0% 19-Jun-17 In Dec-16, we recommended remaining long equities overlayed with cheap hedges. The hedge Buy 1x Jun-17 ATM XLF call, sell 1.8x Jun-17 ATM worst-of calls on XLP and XLU Buy Jun-17 ATM R2K- value outperf call over EEM, contingent on EEM >95% expires out of the money, while SPX has returned 10.2% for the period 5-Dec-16 2.10% -12.90% 19-Jun-17 Following the US election and the initial move in rates, XLF rallied and subsequently stalled. In the same period, the defensive sectors played the catch-up trade 5-Dec-16 2.30% 0% 19-Jun-17 Concerns over US tax reform implementation caused small-caps to underperform relative to other equity markets, including EM Buy QQQ Jun17 132 call , sell XLF Jun17 25 call 20-Mar-17 0.57% 4.73% 19-Jun-17 The trade captured the recent Tech sector outperformance in a period when Financials lagged driven by lower rates Source: BofA Merrill Lynch Global Research. Prices reflective of most recently available data which may be delayed in some cases. “Trade Value” represents current valuation of trades initiated on the “Open Date”. Global Equity Volatility Insights | 20 June 2017 25 Volatility in Numbers (16-Jun-17) Table 11: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (developed markets) 3-month 12-month S&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPI Implied 9.8% 13.4% 10.0% 12.6% 13.8% 12.4% 12.2% 14.0% 16.8% 13.6% 16.6% 17.2% 15.8% 14.6% %tile (2yr) 1.2% 1.6% 0.6% 0.8% 0.4% 4.1% 19.9% 7.7% 5.6% 9.5% 5.5% 1.8% 6.3% 24.9% 1Week Change -0.2% 0.3% -0.4% 0.3% -0.2% 0.1% 0.3% 0.1% 0.1% -0.1% 0.1% -0.4% 0.0% 0.1% 1Mth Change -0.2% 0.0% 0.0% -0.4% -0.5% -0.3% -0.2% 0.1% 0.3% 0.6% 0.1% 0.2% 0.2% 0.7% Realised 7.0% 11.4% 9.6% 10.7% 12.2% 10.2% 10.7% 9.5% 13.3% 12.2% 15.1% 19.6% 13.5% 11.4% %tile (2yr) 11.5% 15.5% 15.6% 9.4% 0.6% 0.8% 21.1% 0.0% 0.0% 0.0% 0.0% 10.8% 1.4% 20.7% 1Week Change -0.2% 0.2% 0.2% 0.4% -0.3% 0.1% -0.1% -0.1% -3.2% -0.3% -0.4% -0.2% 0.1% -0.1% 1Mth Change 0.4% -0.1% 0.1% 0.1% -0.2% -0.5% 0.1% 0.0% -3.8% -0.7% -1.0% -0.4% -0.5% 0.0% Imp-real spread 2.7% 2.0% 0.4% 1.9% 1.6% 2.3% 1.5% 4.5% 3.5% 1.4% 1.5% -2.3% 2.3% 3.1% Spread %tile (2yr) 57.9% 55.7% 45.1% 57.2% 67.8% 71.3% 58.6% 91.5% 100.0% 85.2% 99.2% 61.6% 89.2% 70.8% 1Week Change -0.1% 0.1% -0.5% -0.2% 0.0% 0.1% 0.4% 0.1% 3.3% 0.2% 0.4% -0.2% -0.1% 0.2% 1Mth Change -0.6% 0.1% -0.1% -0.5% -0.2% 0.2% -0.2% 0.2% 4.1% 1.3% 1.2% 0.6% 0.7% 0.7% 90-110 skew 8.5% 8.4% 6.2% 8.5% 5.8% 3.3% 3.8% %tile (2yr) 16.1% 71.8% 8.8% 66.7% 47.9% 17.8% 14.2% 1Week Change 0.2% 0.9% 0.2% 0.7% 0.0% 0.9% 0.8% 1Mth Change 0.5% 2.4% 1.2% 1.6% 0.2% 0.9% 0.9% 10-day realised 12M - 3M term vol spread S&P500 ESTX50 FTSE DAX NKY HSI KOSPI S&P500 ESTX50 FTSE DAX NKY HSI KOSPI Current Level 3.2% 9.4% 8.3% 12.1% 7.1% 9.9% 10.6% 4.3% 3.4% 3.6% 3.9% 3.5% 3.4% 2.4% %tile (2yr) 1.0% 16.3% 21.7% 26.3% 0.8% 15.5% 46.7% 99.8% 98.9% 99.6% 99.6% 98.9% 96.9% 79.5% 1Week Change -1.5% 2.1% 1.2% 2.5% -4.1% 4.6% 0.9% 0.3% -0.2% 0.2% -0.2% -0.2% -0.1% -0.2% 1Mth Change -0.4% 0.9% 0.4% 5.2% -5.8% 0.1% -6.2% 0.3% 0.3% 0.6% 0.5% 0.7% 0.4% 0.9% Cash index Current Level 2,433.15 3,543.88 7,463.54 12,752.73 19,943.26 25,626.49 306.79 1Wk Change 0.06% -1.18% -0.85% -0.49% -0.35% -1.55% -0.84% 1Mth Change 1.35% -2.69% -0.78% -0.40% 0.12% 1.15% 2.38% Source: BofA Merrill Lynch Global Research Table 12: Statistics on implied, realised, skew and term structure for 3-month and 12-month vols (emerging markets) 3-month 12-month EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40 Implied 15.6% 22.9% 25.9% 16.9% 19.2% 24.3% 26.7% 18.5% %tile (2yr) 5.0% 31.7% 28.7% 15.6% 8.9% 39.2% 26.7% 9.2% 1Wk Change 0.5% -1.7% 0.9% 1.2% 0.2% -0.2% 0.5% 0.8% 1Mth Change 0.5% 1.8% 2.6% 1.9% 1.4% 2.0% 1.4% 0.5% Realised 11.8% 25.3% 20.5% 11.0% 17.6% 22.5% 20.4% 14.9% %tile (2yr) 0.2% 58.8% 20.8% 3.2% 8.5% 5.7% 0.0% 2.8% 1Wk Change -1.2% -0.6% -1.1% 0.3% -0.2% -0.4% -0.4% 0.1% 1Mth Change -1.2% 6.6% 0.0% -0.6% -0.2% 1.5% -0.9% -0.2% Imp-real spread 3.8% -2.4% 5.4% 5.8% 1.6% 1.9% 6.3% 3.6% Spread %tile (2yr) 85.5% 11.7% 71.7% 95.0% 65.5% 74.9% 99.0% 74.9% 1Wk Change 1.8% -1.1% 2.0% 1.0% 0.5% 0.1% 1.0% 0.7% 1Mth Change 1.7% -4.8% 2.7% 2.5% 1.6% 0.5% 2.3% 0.7% 90-110 skew 7.0% 5.9% 5.2% 8.0% %tile (2yr) 32.8% 68.4% 26.2% 35.4% 1Wk Change 0.7% 0.8% 0.4% 0.4% 1Mth Change 0.9% 0.4% 0.6% 1.3% 10-day realised 12M - 3M term vol spread EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40 Current Level 8.1% 8.8% 17.0% 12.2% 3.6% 1.4% 0.9% 1.7% %tile (2yr) 4.0% 0.2% 17.8% 26.3% 97.5% 80.5% 57.7% 46.2% 1Wk Change -0.5% -4.3% -2.2% 0.8% -0.3% 1.5% -0.4% -0.5% 1Mth Change -3.9% -8.1% -2.7% 5.3% 1.0% 0.2% -1.2% -1.4% Cash index Current Level 41.22 61,626.41 1,136.99 44,512.15 1Wk Change -0.94% -0.94% -3.70% -2.97% 1Mth Change -1.10% -10.28% -11.99% -6.15% Source: BofA Merrill Lynch Global Research 26 Global Equity Volatility Insights | 20 June 2017 Options Risk Statement Potential Risk at Expiry & Options Limited Duration Risk Unlike owning or shorting a stock, employing any listed options strategy is by definition governed by a finite duration. The most severe risks associated with general options trading are total loss of capital invested and delivery/assignment risk, all of which can occur in a short period. Investor suitability The use of standardized options and other related derivatives instruments are considered unsuitable for many investors. Investors considering such strategies are encouraged to become familiar with the "Characteristics and Risks of Standardized Options" (an OCC authored white paper on options risks). U.S. investors should consult with a FINRA Registered Options Principal. For detailed information regarding the risks involved with investing in listed options: http://www.theocc.com/about/publications/character-risks.jsp Analyst Certification I, Benjamin Bowler, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report. Special Disclosures BofA Merrill Lynch is currently acting as Financial Adviser to Glencore PLC in connection with its proposed acquisition in consortium with Qatar Investment Authority, of a 19.5% stake on Rosneft PJSC, which was announced 10th December 2016. BofA Merrill Lynch is currently acting as financial adviser to Intesa Sanpaolo Group, Banco Santander SA, Warburg Pincus LLC and General Atlantic LLC in connection with the proposed sale of their entire stake in Allfunds Bank to Hellman & Friedman and GIC, which was announced on 7 March 2017. Global Equity Volatility Insights | 20 June 2017 27 Disclosures Important Disclosures Price charts for the securities referenced in this research report are available at http://pricecharts.baml.com, or call 1-800-MERRILL to have them mailed. 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Global Equity Volatility Insights | 20 June 2017 29 Research Analysts Benjamin Bowler Equity-Linked Analyst MLPF&S +1 415 676 3595 [email protected] Abhinandan Deb >> Equity-Linked Analyst MLI (UK) +44 20 7995 7148 [email protected] Anshul Gupta >> Equity-Linked Analyst MLI (UK) +44 20 7996 7062 [email protected] William Chan, CFA >> Equity-Linked Analyst Merrill Lynch (Hong Kong) +852 3508 3921 [email protected] Nitin Saksena Equity-Linked Analyst MLPF&S +1 646 855 5480 [email protected] Clovis Couasnon >> Equity-Linked Analyst MLI (UK) +44 20 7995 0303 [email protected] Jason Galazidis >> Equity-Linked Analyst MLI (UK) +44 20 7996 5713 [email protected] Chintan Kotecha Equity-Linked Analyst MLPF&S +1 646 855 5478 [email protected] Stefano Pascale Equity-Linked Analyst MLPF&S +1 646 855 2631 [email protected] >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. 30 Global Equity Volatility Insights | 20 June 2017