From: Richard Kahn <[email protected]>

From: Richard Kahn <[email protected]> To: "jeffrey E." <[email protected]> Subject: Fwd: Derivatives not priced for a bond-equity melt up or tantrum, making hedging cheap Date: Tue, 19 Jul 2016 16:29:42 +0000 Inline-Images: image0OlgifOlD1E1A4D4978140.gif; image009jpg01D1E147FE917C10.jpg; image012jpg01D1E147FE917C10.jpg; image016jpg01D1E147FE917C10.jpg; image028pngOlD1E147FE917C10.png; image004pngOlD1E18AFACCFE90.png in process of setting up account with amanda ens at investment bank now would you like to see these emails or shall i just have amanda send trade ideas? please advise thank you Richard Kahn HBRK Associates Inc. 575 Lexington Avenue 4th Floor New York, NY 10022 tel fa l ce Begin forwarded message: From: "Ens, Amanda" .1 Subject: Derivatives not priced for a bond-equity melt up or tantrum, making hedging cheap Date: July 19, 2016 at 10:07:27 AM EDT To: "Rich Kahn" Reply-To: "Ens, Highlights from this week's Global Equity Volatility Insights 125 120 - 115 - 110 105 100 95 so Dec-15 Jan.I6 Fe -16 Mar.16 Ape.t6 lhat-16 Jun- 6 —Long-lerrnUS Treasury torch S&P SOO(*) EFTA00643874 Correlation of US 20e YearTreasuries & SPX - -06- -08- M-13 Dee.13 Tes-14 Od-14 Taar-15 Aug-15 Jan-16 Juri-16 3m relise ly restée • 6m 61y in'Oed 15% 14% 12% Tele I: Analys expeacbansitle suptiscson ILS cm. Weil errants Mile eere is I ttk rab pricedinin the epdonmeket vs lise:tical eanings moues Ex pected Option Pat 4 31-day Axent Report Aug Sep Inplial Eamings Realiad BofAVIL &paie Symbol Name Date Vol Vol Move Avg Motos Vol Rating Surprise &ope for Surprise 4104J no nec, cro immola 314% 3C6§ 27% 196 353% Incleaserm -.pou 'eue bois en CCS7 OEA AU cewenvi BK '0022215 195'0 '9 5% 10% 08% 210% Bey AGI-AU 43. DEMY 'EU ri 7: c% '9 4% 25% 18% 155% "intia TLSAU TIELSTRA 110812116 14.6% 14.3% 0.4% 1.5% 152% Bug Dansable Wear cent reineestrrent NGNAU NEVCREST 15022016 Kt% 452% 2.8% 4.6% 453% Fity Upside Ume toFTI6Productice BNP AU LW LOWTON 1608.0416 328% 36.8% - 2.2% 433% Eltly ibn& Veule on PetioleurnProcbmen GSL AU I7S1 1728/2216 205% 203% 1.6% 3.6% 203% Neutra' Douane Mar prame from loner US derme QBE Ad Ce '7C.3 2:15 855% 275% 5.1% 23% 353% ederertc- ASX4u ASX t80&2016 2.5% 184% 04% 1 t% 180% tackeideti— UPI.AU %%005n *mole 283% 270% 341% 196 287% Etuy STDAU 5AN705 19222015 404% 393% 34% 27% 511% Sis ...z.s:, go-met as re-Omon FLIGAU FO-TEEC-E W26.2016 592% 57.3% 42% 64% 61.4% Lindeteg:- ._3: 'Deal fuite redt.aoi n CO2 WESAU WESFnefil =I 24022016 212% 20.7% 1.7% 18% 185% Llilete?:*- :cane DNdend putacx WFD AU WE. i- .E... 2408/2016 232% 224% 20% 06% 233% laxissel — :cana Ca.'lldaice ',one tyveak 03P 1:011PattfAllerillyleGbh.IRMOICI Il 40% - 2 30% 2E% 10% o - -20% 2. 'D — if ï ene qkryre el N e) e) ••• te) tn CO CO — IFF buy-pide œstre %-alpit cl total. Click for full report EFTA00643875 US: Derivatives not priced for a bond-equity melt up or tantrum, making hedging cheap • Both US equities and long-dated US Treasuries recently touched all-time highs, with the S&P 500 +7% YTD and TLT (US 20+ Year Treasury Bonds) up 16% on a total return basis [Chart 1] • Despite this, bond-equity realized correlation remains strongly negative and is near 3yr lows, creating attractive entry points for directional long correlation trades (chart 7) • For example, a 6M ATM best-of put on SPX & TLT costs'-O.8% (82.5% discount to the average vanilla put) and could serve as a cheap hedge against an inflation shock or hawkish reversal in Fed rate hike expectations, both potentially amplified by risk parity unwinds from max leverage • Alternatively, equity investors who anticipate continued bond outperformance can substantially cheapen longer-dated equity calls via lY ATM worst-of calls on SPX & TIT (- 0.9%, 83.5% cheaper than a vanilla SPX 1Y ATM call) Both US equities and long-dated Treasuries recently hit al-time highs, with However, bond-equity realized correlation has fallen to near 3yr lows as YTD total returns of 7% for the S&P and 16% for TLT Treasuries have diversified equities well this year Scum Ed4 Ikea linatelaxi Rouse. Curran 31414.:45 Wasp ¶t-Mit Aw retnvolllT and Son BYAVal loth GtOal Resew. Daly <Mka ISJSUltrix91184.1.% US 9). YewnksWsae%Mwfea by TLT Sex Volatilky of risk parity portfolios has come in this year as cross-asset performance has been diversified YTD-as a result, risk parity leverage has remained elevated Sam eciA ly.0 Odd Rowesh 031/4 400 bcci 15.011Stolki*T8 Sam. edA IWO WWI Octineseatt I:J*4406w ISJU-Sh,WWIll Europe: Cheap upside in laggard stocks with bearish positioning Buy Oct16 - 110%F calls on VIE FP STAN LN Al FP ISE SQ and MUV2 GY for an average price of 2.37% (ref C19.39 C96.03 C6.02 £6.087 and f148.7 respectively): • The 5 names screen as the most attractive candidates based on (table): 0 Stock underperformance relative to their sector since the Brexit vote: they have lagged their sectors in the post-Brexit vote rebound from 27-Jun through 15-Jul Cheap calls: YTD percentile of 3M 25d call prices (as of 15-Jul) is low 0 Bearish stock positioning: short open interest is high vs. other stocks in our list, suggesting the stocks may outperform in a potential market squeeze higher. • Air Uquide (Al FP) screens inexpensive in our earnings implied move ranking (table in next section) • Light exotic implementation: Oct16 110%F call on an equally wt basket (qEUR) costs 0.81% indic. (correl = 64%), 66% discount vs. avg single stock calls Top 20 candidates for inexpensive upside potential: Veolia (VIE FP), Standard Chattered (STAN Lk), Al Liquid (Al FP), lberdrola (IBE SO) and Munich Re (MUV2 GY) stand out 3M Stock Sector Short 3M 25d call Oute4yUnder(-) 25d Underperfomtance Shod Open Option Overall Ticker Sector performance Jun performance performance open ll price (YID rank interest rank price rank rank" ca (since 27- ) (since 27-Jun) iMerests pementile) VIE FP Utlbes (SX6P) 7.1% 11.3% -0.1% 1.3% 1.5% 2.7% 7 38 16 1 STAN LN Banks (SX7P) 13.1% 10.6% 2.5% 4.5% 2.4% 02% 55 8 5 2 M FP Cheencas (SX4P1 8.1% 8.8% -0.7% 1.7% 1.4% 02% 35 28 5 3 IBE SO Ualbes (SX6P) 7.7% 11.3% 4.6% 1.3% 1.3% 3.9% a 39 21 4 IOUY2 GY Insurance (SAN 3.1% 8.0% -4.9% 1.6% 1.4% 14.1% 5 31 37 5 ANN VX Industret (SXNP) 3.5% IO2% -6.7% 1.2% 1.4% 13.9% 3 II 36 6 SAND SS Industret (SXNP) 11.9% IO2% 1.7% 5.6% 1.7% 7.1% 52 4 24 7 ASIA_NA Technobgy (SX8P1 102% 10.6% -0.4% 1.5% 1.7% 0.4% 37 34 9 8 ITX SO Petal (SXRP) 8.1% 9.5% -1.4% 0.9% 1.5% 0.0% 29 57 1 9 TSCO LN Nall (SXRP) 7.5% 9.5% -2.1% 6.0% 22% 47.5% 18 2 67 10 WON GY AuIce (SXAN 13.7% 9.7% 4.0% 3.1% 1.8% 0.6% 61 IS 12 11 AAL LN Bate Resources (SXPP) 32.1% 202% 11.9% 5.8% 3.3% 0.4% 77 3 9 12 AGN NA Insurance (S)0P1 -42% 8.0% -122% 3.4% 2.7% 75.0% 1 13 75 13 ROSA NA CO 8 Gas (SXEN 7.7% 10.7% 4A% 0.6% 1.4% 0.6% 11 66 12 14 1418 SS Nall (SXRP) 9.7% 9.5% 02% 4.9% 1.5% 16.1% 42 6 41 15 SAN FP Heath Care (SXDP) 7.4% 7.9% -OS% 1.4% 1.5% 12% 36 36 18 16 Fat FP Industras (SXNP) 5.4% 102% -4.8% 1.4% 2.0% 19.4% 6 37 47 17 IF X GY Technobgy (SX8P1 9.8% 10.6% -0.9% 4.4% 22% 19.9% 33 9 48 18 C6K GY Banks (SX7P) 3.8% 10.6% -6.8% 3.1% 2.9% 73.0% 2 16 73 19 HPN NA Waxen (SXKP) 7.8% 9.4% -1.7% 4.3% 1.9% 35.8% 23 10 58 20 Sou* Scallicerinfd,GotoiRosorch roan smut) swat cabmen:a on 1tro 21.1a WA 34123doill fats as dIS.U(pron.3 usinpsn3 srcoi4it-to -arm ea NM oi al Wyly veglett a asapol Unicfpritfructo nil Steal gen Moisten ted Oixlm pl:.,wk "Mow. niseil4 at tsar d al sixt Warp 4 trams &fa prangs a Ow *ulnae upoiloalad bOlull Ms it a srawied ed a riceammaid Is, any rdeguaty ass a wcw d seas lignn Ivalcoescle. M fentrrertabd he conme• ar$ h. con n**Itel cinnstran 0 ctrizies Sc., mini av mtg., Rows EFTA00643876 Asia Padflc: Screen for AU stock options to capture earnings surprises • Buy TLS, CSL Aug-16 puts to hedge potential earning downside surprise • Buy NCM, BHP Aug-16 call spreads to hedge potential earnings upside surprises • Indicative pricing (As of 18-Jul-16): > Buy Telstra 25-Aug-16 95% puts: 1.05% (iv: 17.1%, -31d) > Buy Si c 25-Aug-16 95% puts: 1.09% (iv: 23.3%, -23d) ­ Buy Newcrest 25-Aug-16 105/115% call spreads: 2.64% (iv: 46.2%/44.6%, 21d) > Buy BHP 25-Aug-16 105/115% call spreads: 2.22% (iv: 35.2%/32.7%, 26d) Week in Review: US equity vol has declined towards its lyr lows as the S&P made new highs • SPX 1M straddles are currently the most attractive in terms of break-even probability among many global major indices, breaking even 79% of the time over the past 3 yrs at current pricing (Chart II • The current net 'buy-side' positioning as a %-age of net positioning is the most bearish as inferred by e-mini futures since 2010 for which the S&P50O hit a relative and/or all-time high at 'Chart 2] • Last week, the front end of the VIX futures term structure steepened last week to near its 4yr steepest levels partly due to net vega in VIX ETP products grew $34.5 mn over the week (Chart 31 • The recent post-Brexit rally in US equities coincided with the sharpest flattening in SPX 3m 90-110 skew ever recorded over the past 10 yrs with the move uniquely driven by call skew [Chart 4] 1M ATM straddles on the S&P500 screen the most attractive among major indices globally, as they would have broken even 92% of the time over the past year at current pricing Index ILA straddle cosi IV Break-even probability Lai I Y Last 2Y Last 3Y SPX 2.3% 9.8% 91.8% 81.5% 79.0% HSCEI 5.1% 21.1% 87.9% 76.3% 71.9% ASS1 3.2% 13.8% 84.4% 701% 61.6% HSI 4.2% 17.7% 83.6% 692% 64.0% WISE 3.4% 13.2% 83.3% 69.7% 60.5% KOSPI2 2.8% 11.9% 78.1% 71.1% 71.6% NIFTY 3.4% 14.0% 72.6% 71.6% 73.6% NKY 62% 26.2% 71.6% 50.3% 47.0% S&P500 at all-time highs but net 'buy-side' positioning still looks bearish EFTA00643877