Bank of America internal email discussing SPX put option strategy tied to post‑Trump rate volatility

From: Ens, Amanda Sent: 11/15/2016 2:44:06 PM To: jeffrey E. [jeeyacation@gmail.com]; Richard Kahn Subject: SPX put contingent on higher rates Attachments: image001.jpg; image002.jpg; image003.jpg; image005.png Importance: High Navigating post-Trump volatility • We are recording unprecedented divergences in falling equity vol with rising rates vol post Trump's win. Intra- day S&P realized vol collapsed from near 60% to below 20% in 2d [Chart 1] • While equities have shown less conviction over what a Trump win means (given strong sector rotation), the bond market has sold off with one of the largest moves in history [Chart 2 & 3] • Stabilizing rates volatility from here is key to markets remaining calm and while equity upside may continue, it is not without higher risks • We like cheap optionality to hedge long-equities if rates continue to move sharply For investors long equities, we look at ways to cheapen protecting from downside risks in the event of further bond market volatility catalysed by Trump policy uncertainty • Buy an SPX Apr-17 95% put conditional on US 10Y CMS > 2.5% at maturity for 0.87% O 70% discount vs. vanilla O CMS ref. 2.11%, SPX ref. 2,164.2 CMS = constant maturity swap Chart 1: The response in S&P 500 realized equity volatility to the US election surprise was similar to Brexit but more extreme, as the spike in volatility collapsed at record speed 140% =•• 120% a, 100% .1 80% - a 60% ▪ 40% 5 20% 0% 20% 0% • • • • • • •• • • 18 ; . . • •%.• • .% • e• j is • •••„ • •• US Etecbon (10. & 11-Nov vol S 9-Now fol) Brexit (28- & 27-Jun lot vs 24-Jun %pi) 40% 60% 80% 100% 120% SPX 1-day intrcityvol Source: BofA Merrill Lynch Global Research. Based on daily data from June 2004 to current 140% 160% Chart 2: Ten-year US Treasury yields see a near record spike after Chart 3: Long Bond futures prices down near record amount the US election (-5%) in the four days since the election HOUSE OVERSIGHT 01431024% 19% 14% 9% 4% I " 8 —------ cn (y) co 0 te) .6, co La. es.1 6 Fs.; 6. 8 co gg (r& cr) o 70 15% 60 50 10% 40 II 30 5% 20 10 0% -5% L.r2 :7- 0 -8 (.3 8 - •10% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 • Largest 4-clav %changes in 10yr UST yeelcIs since 1962 Change rneasixed n bps (ngtt) Source BofA Merrill Lynch Global Research. Based on daily data since 1962. Amanda Ens Director Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park, 5th Floor, New York, NY 10036 The power of global connections' Bankof America Merrill Lynch — 4-day rehrn of a 30fr UST futures mestrnent 14-Na -16 Source BofA Merrill Lynch Global Research This message, and any attachments, is for the intended recipient(s) only, may contain information that is privileged, confidential and/or proprietary and subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete this message. HOUSE OVERSIGHT 014311