From: "Ens, Amanda" ‹..

From: "Ens, Amanda" ‹.. > To: "jeffrey E." [email protected]>, Richard Kahn Subject: GEVI Highlights: Understanding when risk parity risk increases! buy the seasonal oil dip own N KY calendar call Date: Tut, 09 Aug 2016 15:11:57 +0000 Attachments: GEVI_08.09.2016.pdf Inline-Images: image° 14pngOID1 FI EIBE73F9FEO.png: image° 5png0 1 D IF 1 BEIE73F9FEO.png; image016png0 ID IF 1 BBE73F9FEO.png; image° 17pngOID1 F I BBF.71F9FEO.png: image° Sjpg0 1 D1F I CC B 1833830.jpg; image019jpg0 IDIFICCBIEt33830.jpg; image020jpg0 ID IF 1CCB 1B33830.jpg: image021 jpg0 1 D IF 'Call 833030.jpg; image004pngOIDIF20E2B2E3EDO.png; image007png0 IDIF20E2B2E3EDO.png; imagc009png01 DI F20E282E3ED0.png; image0 1 png0 ID IF20E282E3EDO.png; image013png0 101 F20E2B2E3EDO.png; image027pngOIDIF20E282E3EDO.png: image001pngOID1 F20E368 6A50.png; image002png0 101 F20E368 16A50.png; image022png0 101 F20E368 1 6A50.png; image023png0 101 F20E368 1 6A50.png; mage024png0 101 F20E368 16A50.png Highlights from this week's Global Equity Volatility Insights US: Quantifying the (bonci•eq any correlation) risks to risk parity • Last week's sharp sell-off inlGlits renewed fears of forced selling by risk parity funds jthart • While the Orawdowm in US TreasurieS,WISAWISS and ultimatehrlilliMirscoonfollatasmithintsbmtalSOChala2) the latent risk remains worth monitoring as ajascecoge is still near max levels, arms% a variety of (Out 5] Jlilbondallocationsarehistoricallyelevated and c;:t_(iji) markets continue to be skeotiral of a 2016 Fed hike • Hence we provide a simple scenario tool to help investors assess what relative moves in bonds & equities could catalyze significant deleveragirjg by rules-based risk parity funstsifti141 • fix example a -2% nay decline in the S&P SOO cougla with a .0 A% fall in toy Treasury pacp_s(000cclivelsificatct0) could trigger a 2S% deleveragiog (fathateyakd notional) today whereas a .4%50X drop and 41% Treasury rally lgood diversification) would generate no selling pressure underscoring the critical role played by bond- 190itY_Correlation ingoverning the severilySipotential_riskparity_unwiali,_ last walk's shop soli•on in JGBs did not Consequently. Mt parity pmfolio volatility Herta risk parity funds did not deter spillroyer into US Treasuries remainedquitemused rnamlany andremain highs/levered L;yid:[email protected] cyjd:[email protected] le:titimage01 log#01D1F 1[9.5 A855900 A855900 ABS59D0 tan knoll LonfInt Mon konnti uno non fon Milt* 1pten Dean knIn inn in) canonnworinenonenennn none et woonno SUM anus nun.> -ea • OW.* A MM. Wean OO:aril., a) S.M.. • IV cary I VW *Ws .d.4 n anicenntenn anima Wines ne ▪ 6.194 ten Onion tnnin nion Inn In 3, 0:4`2 Pep t4 rr COItiag In Wenn, a.m.*, stnesserrawshmananessosss. Sto6a) **NM' ennin n .60 MN.. nne. o gannnernann onnnion renow an.) tonnn t own Current theoretical deteversoig amounts (of wavered notions) for an tquihdfixed Income risk parity pttlfolio .ith an t% target va'atlity vied,/ and 2x max Irmo?, tap cO.image012 TPO101Dlt IC9 SABSS9XI area annten Cannon Was anon. CI.. n Fin nannalnenri *nitannurnnononnid fOsinnononen vy roams oun .note non ir nine. nNS4* rteweulta e date nn. >ann., inennon not nor non In; Emma nal I fit EFTA00821736 Europe: Buy the seasonal oil dip via bullish X-market risk reversals noted X-markot rick ...venal- Sell Ix USO 3M 25.1 (-88% ctriko) patsjAhaly fund 21.x cXFP Bac ogoky) 25d (-106% ctrilco) calls (Insffs,) • The seasonal sell-off in oil presents a 'buy the dip' opportunity according to our commodity strategists who expect prices to rebound to $55/bbl by year end • BofAML strategists have turned bullish Oil & Gas equities given more CB (BoE) easing, attractive div yields and exposure to the EM recovery narrative • SXEP has been the worst performing SXXP sector over the last 1M, suggesting it has ample scope to rally if it is to catch up to the broader equity market ufshan, • USO puts are rich vs. SXEP calls: the number of long SXEP 25d calls that can be fully funded by selling 1 short USO 254 put is near historical highs (90th %Ile since '08, 2'Ll Chid) • SXEP calls would have offered better value than USO calls at current levels in terms of average historical payoffs as well as the frequency of positive retums tar ( hart) • CSPP has purchased an outsized proportion of Energy corporate bonds and this has yet to feed through to equities according to our credit strategists (4th chart) • Potential USO losses may be dampened If the recent S/Oil correlation persists: Since mid-2015 oil drawdowns have largely coincided with USD weakening 0, chart) • Alternative (unlevered) implementation: Sell USO 25d puts to fund fully fund closer to the money SXEP calls for early participation in any potential SXEP rally (6th chart) SXEp(00& Gas equity)tms been the worst performing Sloss SOO seder The leverage provided by the kneaded risk reversal (long SXEP call/ over the last IM shodUSDpu) is affraelive kola tasberieal standpoint V.Icid:[email protected] p arfitle: cChanDetails xmlosmsWlittp://www.w3.ore2001./XPALSchema.instance nolnepredehttP://www.w3.org/200IAMLScheme lastUpdatede0301-01-0I.T00:CO:00" Styles'EllueDiamone Description: <UnkedaejectInfo ornins:niehttrftwww.wl.org/2031/XMLSchema.instance nolnepreelehtte://www.w3.org/200I/XPALScheme FikNamceandon\researchsharedbhareASEC TOR \ QUANTWolatility Gkthal WorkCommentsVaug. 16%.latun‘SXEP.USO Stalin" SheetNamerVole :tau OSAISN Wean. Rain Ombra, ?Agit, Molt SXEP calls would have generated a higher average payoff and ram frequent positive reborn vs. USO calls fallen sized for an upfront oast equal bathe current peke of the USO 3M Ed pul) id:image00d.prigra,0101f 1A3.FD13EDCO sin wawa aA Oita gawsw on Stegoare amen rel hailt410:0 An tab Wawa worker euefro resnmaa..e • /,We Wane e‘oneee 0••••• V4.KY NOON Enema Pe *3 is Illeeln re. Id war al non., WM WIS. Selling the USO 25d put (4.7 strike as of Mug) lo buy the SXEP 42d Number of bonds p.athned by the EGG in tbek C9PP programme by call (180 tenet Sava) for 4 provides tatty upside parlicipaliem seder Oil dreradottm have meaty unleaded with g weekteing and a-12% downside buffer on the short USO put leg cl'icid:image007.png4p01D1F1A3.FD13E0C0 L.,:tid:image005.pnggpOlD1F1A3.FD13EDCO etle. eChartEletas smInesniehttP://www.w3.cel/20000ALSchema-instance" xmlespadehttp://www.w3.org/2001/XMLSchema" Lastipdateds'003141-01TC0:00,00' Slyees"Blualiamone Description: .ainkedObjectinfo aralospeliehttla://www.w3.org/2001/XMLSchema-instance" xmlespadehttp://www.w3.org/2001/XMLSchema" FileNameandon\researchshared\shareASEC T0R‘QUANTWolatility\GlobalkWorktomments\94tut 1611ason1SXEP.USORR.xlsni SheetNamee'EURUSD" LastUpdatede2016-08-08T14:21:10.1469663401:00" RangeNarnee_NG caa04" layouteTwoSidellySide Typeethare ChartloycutenPotraitTwoSidebySide Style="glueOiament/> en Oeed boa.. Son tors wooled ban Awn onowt-tich,3^40. aneMwrsweor Rell•OSta• lOWIP•liall• 0$1•10, 01410:0, (01 • area). tivereremeervommetweeerreve Asia Pacific: Own NKY calendar call going into the uncertainty Sep BOJ • Trade update: Closing the NKY Aug/Sep put calendar trade opened on 25-Jul • NKY & USDJPY 1Mth yds are down to YTD low: Pricing in a slow summer • USDJPY 2M-1M term structure at its steepest & NKY's in its 98th %-ile since 2011 • Bob% ML: Sol plans for Sep16 'comprehensive assessment' create uncertainty • Market expectation for the Sep B01 in terms of fwd vol is the near its lows YTD • A further squeeze in US and Japanese yields is most positive Japan in Asia • Buy 1x NKY Oct 17500 call, short 0.65x Sep 17250 call: Gamma neutral, long vol indicative pricing (as of 1-Aug-16, ref: 9120): > Buy lx NKY Oct 17500 call: 1.13%(8187) (iv: 19.2, delta: 24%, gamma: 3.8%) > Sell 0.65x NKY Sep 17250 call: 0.66%(8110) (iv: 16.9, delta: 23%. gamma: 5.9%) ).• Net: 0.70%(8116) (delta: +9, vega: 0.08%) Japanese equity volatility has dropped to YTD lows: USDJPY short-dated vol also USDJPY 2M-1M ATM term structure (1.7%) is at its 5-year high while the NKY 2M- retraced to near YTD low levels 1M term structure 0.5%) is at Its 98th percentile 12!6157779 c d I tC8863790 Swett B:rmarti trch Goa RineW0,. ON) en fran 5Jan. 16U SAupd6 Sone Bommemitywlintteretseirm EFTA00821737 Current NKY Sep-Oct ATM volatility is cheap relatively to impied volatility going Into The Nikkei is the most sensitive to rising USD and JPY rates among Asian indices previous BOJ meetings in 2016 <id 411121733 a t-cl.l&C6885222 CI:Co Pe:;:tc• Mark-to-Market of the long lx NKY Oct 17500 call, short NKY Sep 17250 call structure cia It-1'3,0"S $WW,6 SAWA 14%6 Ontai Rano kart Rhin, Yon white 5.66:e F66.116/11t,nzt,G66.1Re466 'Antis e•an 2:n Week In Review: US equities at new all•time highs on upbeat employment report • The SPX vol term-structure steepened materially on lower shorter dated implied vol with the lyr-lm ATMf implied vol spread reaching its highest level in almost 4 years [Chart I] • Near multi-year flat call skew on Biotech (188) makes long call spreads an attractive option strategy to initiate or replace long positions to lock-in profits from the recent strong rally IChart 2) • The 2016 election move implied by the VIX term structure is, in our estimate*, approx. 1.4%... 'Chart 3) • ...which is notably very close to the typical SPX daily realized move post-elections since 1928 [Chart 4I The SPX vol term-structure steepened materially on lower shorter dated Near multi-year flat call skew on Biotech (188) makes long cal spreads implied vol with the lyr-lm ATMf implied vol spread reaching its highest an attractive option strategy to initiate or replace long positions to lock- level In almost 4 years in profits from the recent strong rally id int.66:01) I ivvr, 44 011)1 I 1116 F:161 •IF [spit id.image(106.png@, 0101F Ihh.LA6, 1.40 Sone Oxman wenOmer Rowe 01 El ewe tom hatra-12 4,1-kg-16 The 2016 election move Implied by the VC( term structure Is, in our estimate. approx. 1.4%_. 1;2,A imaec007.pnegd0l I11FIBS.EA6F4E40 Some PotlUtell Lynn adn/Resainh Deli OM lenS403-1II0S-AuTS ...which Is notably very close to the typical SPX daily realized move post-elections since 1928 ;:cid:image011.pngeOlD1F186.6A614640 sauce SAIlerre Llrd,cloed Reseach.Ortydsa Iron 241409 so SAW& Sauce batrAlarIlLych Dine Aescurch Dab Iron Weal bittlik • S Equity Derivatives Research I Boil. Mena Lynch I Mend Lynch, Pierce, Fenner & Snwth Incorporated I .1 646 ESS44.10 I *1 64615S St7S •1646455-1247 +I 646455.2611 I I1: message. and my attosn rne r 1c stcnded momenta) only, may contain information that is cendeged. confidential am,/ or propnetary and subpct to Important terms and cohemons available at II you are not the intended moment, please delete this message EFTA00821738 This message. and any attachments, is for the intcndcd red lent s onl . ma contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at If you are not the intcndcd recipient, please delete this message. EFTA00821739