Global Equity Volatility Insights
Why S&P vol dispersion may be the best
way to trade a bubble in Tech
we estimate 68% of the
06 June 2017
Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com
US
How to detect and position for a potential Tech Bubble
Our investment strategists recently warned against the risk of an overshoot in US Tech,
as data on valuations, relative performance, and inflows invoke echoes of the late ‘90s.
However, rising Tech vol alongside rising Tech stock prices – a classic sign of an asset
bubble – has yet to materialize, suggesting still early stages of bubble formation.
Derivatives can be a key tool for trading bubbles, allowing investors to capture asset
price upside while mitigating reversal risk. To this end, we like stock replacing FANG
positions or overlaying Tech exposure with Nasdaq 100 (NDX) put spreads. Long
volatility dispersion strategies are particularly well-suited for trading asset bubbles, in
our view, as they can profit from both the inflation and deflation of a bubble without
needing to time the top. Specifically, we like SPX 12M Top50 dispersion to position for
a potential Tech Bubble as (i) the Top50 basket is dominated by Tech stocks, hence
would benefit from any rise in their vol from currently low levels; (ii) the trade would
benefit from any downward pressure on broad-market correlations as Tech stocks
decouple from other large caps; and (iii) the late ‘90s Tech Bubble generated the most
sustained period of elevated S&P vol dispersion in history.
Europe
DTE Sep17 collars can hedge DTE-TMUS merger risk; value in Enel bullish riskies
DTE GY has run too fast, too quick: investors who own stock should consider hedging a
pullback using a Sep17 collar (+17put/-18 call for 46bps) to hedge losses greater than
2.9% while retaining upside to 18 (stock’s ~15yr high is 18.05). Extending our EU equity
vs credit theme to single names, we find Enel 3m bullish risk reversals screen attractive
as Enel’s projected 12m div yield is high versus Enel CDS (suggesting value in owning
equity vs credit) and the price of 3M bullish risk reversals is low (versus other names) as
well as versus history (2 nd 5y percentile).
Asia
Buy best-of puts to cheaply hedge a reversal in the melt-up rally
While still high central bank liquidity may continue to push markets higher, heavy equity
and option positioning suggests the risk of a market reversal. To minimize the cost of
hedges and take advantage of the recent decline in volatility and correlation, we suggest
owning 14-Sep-2017 95% strike best-of puts on KOSPI2/HSI/NKY at 0.8%, a 45%
discount to average vanilla puts.
>> 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 32 to 36. Analyst Certification on page 29. Price Objective
Basis/Risk on page 29. 11753360
Timestamp: 06 June 2017 01:43AM EDT
Equity Derivatives
Global
Global Equity Derivatives Rsch
MLPF&S
Nitin Saksena
Equity-Linked Analyst
MLPF&S
Stefano Pascale
Equity-Linked Analyst
MLPF&S
Benjamin Bowler
Equity-Linked Analyst
MLPF&S
benjamin.bowler@baml.com
William Chan, CFA >>
Equity-Linked Analyst
Merrill Lynch (Hong Kong)
Michael Youngworth
Equity-Linked Analyst
MLPF&S
Clovis Couasnon >>
Equity-Linked Analyst
MLI (UK)
Jason Galazidis >>
Equity-Linked Analyst
MLI (UK)
Abhinandan Deb >>
Equity-Linked Analyst
MLI (UK)
Nikolay Angeloff
Equity-Linked Analyst
MLPF&S
See Team Page for List of Analysts
Table 1: 3M volatility (weekly changes)
Implied Realized
S&P500 9.5 (-0.1) 7.3 (-0.4)
ESTX50 13.0 (-0.4) 11.1 (-0.6)
FTSE 10.6 (0.4) 9.2 (-0.5)
DAX 12.2 (-0.7) 9.9 (-0.7)
NKY 14.2 (-0.2) 12.5 (0.1)
HSI 12.4 (0.3) 10.1 (-0.2)
KOSPI 12.8 (-0.3) 10.6 (0.0)
EEM US 15.4 (-0.1) 13.2 (-0.8)
TOP40 15.1 (1.0) 10.9 (0.0)
RDX 24.7 (1.2) 21.9 (0.0)
IBOV 25.3 (0.5) 26.4 (-0.2)
ISE30 19.6 (-0.2) 14.0 (-0.4)
Source: BofA Merrill Lynch Global Research
BofAML GFSI TM X-Asset Risk Landscape
GFSI below ‘normal’ for longest period since summer 2014
The GFSI continued its decline last week, falling to -0.21 as of 2-Jun from -0.17 a week
prior. The indicator last spent a significant proportion of time below -0.2 back in
summer 2014, when cross asset volatility recorded long term lows.
• Equity risks led the broad based decline in stress across asset classes
(Chart 2 and Chart 3), led by equity skew.
• While most stresses fell, crude oil volatility was among the top gainers
(Chart 2) as oil continued its slide despite the May OPEC meeting seeing
agreement for extending production cuts.
• Also, Euro member bond spreads recorded a historically significant move
higher (Chart 5) as the potential for early Italian elections causing political
instability amidst ECB tapering revived concerns about European sovereign risk
Chart 1: Latest* stress across GFSI sub-components
2.0
1.5
Red shaded area highlights components in
1.0
0.5
0.0
-0.5
-1.0
-1.5
GFSI Stress
1.61
1.49
Basis Swap USDJPY
Govt-OIS EUR
1.08
0.99
Basis Swap EURUSD
Euro member Bond…
0.81
Bond Basis EUR
USDJPY Skew
Nikkei Skew
Govt-OIS USD
CDS Index Skew USD
HY Bond Flow
CDS Index Skew EUR
Source: BofA Merrill Lynch Global Research. *Latest as of 2-Jun-17.
Bond Basis USD
IG Foreign Sovrn Bond…
Libor-OIS USD
GBPUSD Imp Vol
Volume Flow
Libor-OIS GBP
Libor-OIS JPY
Risk
Skew
Flow
Green shaded area highlights components in
Bullish territory
-1.06
-1.08
-1.19
-1.20
-1.29
EURJPY Skew
AUDJPY Skew
Equity Fund Flow EM
Sub IG Foreign Sovrn…
Libor-OIS EUR
HY Corp CDS USD
Comdty Imp Vol Crude
IG Corp CDS EUR
ESTX50 Skew
IG Corp CDS USD
HY Corp CDS EUR
SP500 Skew
USDJPY Imp Vol
HSI Imp Vol
FTSE Imp Vol
Money Mkt Flow
3Y/5Y Credit Curve EUR
Comdty Imp Vol Gold
ESTX50 Imp Vol
Comdty Imp Vol Copper
SP500 Imp Vol
Int Rate Imp Vol USD
Nikkei Imp Vol
EURUSD Imp Vol
Int Rate Imp Vol EUR
Chart 2: Change** in stress across GFSI sub-components.
0.4
Change in GFSI Stress
0.0
-0.4
-0.8
0.23
0.19
CDS Index Skew USD
Bond Basis EUR
0.16
0.10
Comdty Imp Vol Crude
Euro member Bond…
0.09
IG Foreign Sovrn Bond…
GBPUSD Imp Vol
Govt-OIS EUR
FTSE Imp Vol
Comdty Imp Vol Gold
Source: BofA Merrill Lynch Global Research. **Latest as of 2-Jun-17. Change vs 1 week prior (26-May-17).
Equity Fund Flow EM
HSI Imp Vol
Libor-OIS JPY
USDJPY Imp Vol
The GFSI Risk Allocator (using Bull, Bear & Neutral weights of 2, 0, 1) suggested a 21.7%
overweight position on 2-Jun (vs 13.0% OW as of 26-May). The percentages of Bullish,
Bearish and Neutral GFSI components (as used in the Risk Allocator) as of 2-Jun were
30.4%, 8.7% and 60.9% respectively.
3Y/5Y Credit Curve EUR
EURJPY Skew
IG Corp CDS EUR
Sub IG Foreign Sovrn…
Volume Flow
USDJPY Skew
Bond Basis USD
Int Rate Imp Vol USD
HY Corp CDS EUR
SP500 Imp Vol
HY Corp CDS USD
AUDJPY Skew
Basis Swap EURUSD
Money Mkt Flow
Libor-OIS GBP
Nikkei Imp Vol
Risk
Skew
Flow
HY Bond Flow
EURUSD Imp Vol
Libor-OIS EUR
Comdty Imp Vol Copper
Libor-OIS USD
ESTX50 Imp Vol
Govt-OIS USD
IG Corp CDS USD
Int Rate Imp Vol EUR
-0.07
CDS Index Skew EUR
-0.10
Basis Swap USDJPY
-0.29
-0.38
ESTX50 Skew
Nikkei Skew
-0.53
SP500 Skew
2 Global Equity Volatility Insights | 06 June 2017
Chart 3: Equity stresses fell by the most last week
Chart 4: Among regions, Japan & US stresses declined the most
0.1
0.0
-0.1
-0.2
-0.3
-0.4
-0.5
-0.6
-0.7
-0.8
-0.9
0.05 0.03 0.01
-0.02
-0.12
Commodities Credit FX Rates Equities
0.10
0.00
-0.10
-0.20
-0.30
-0.40
-0.50
0.02
-0.01
-0.05
-0.13
EM Europe US Japan
Latest stress (02-Jun-17)
Change in stress
Latest stress (02-Jun-17)
Change in stress
Source: BofA Merrill Lynch Global Research. 1wk change (26-May-17 to 2-Jun-17).
Source: BofA Merrill Lynch Global Research. 1wk change (26-May-17 to 2-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%
86%
Nikkei Skew
83% 82%
SP500 Skew
Euro member
Bond Spread
76%
Libor-OIS USD
72%
CDS Index Skew
USD
IG Foreign Sovrn
Bond Spread
63% 61% 61% 61% 59%
ESTX50 Skew
Basis Swap
USDJPY
Stress fall
Stress rise
Libor-OIS JPY
Libor-OIS EUR
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 (26-
May-17 to 2-Jun-17).
Chart 6: Global volatility & credit spread stress in the GFSI
0.4
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
0.06 0.05 0.03 0.00
Sovrn risk
Latest stress (02-Jun-17)
Commodity Vol
FX Vol
Equity Vol
Change in stress
HY CDS
Source: BofA Merrill Lynch Global Research. 1wk change (26-May-17 to 2-Jun-17).
-0.01 -0.02 -0.03
IG CDS
Rates Vol
Global Equity Volatility Insights | 06 June 2017 3
Volatility in the US
How to trade the rise & fall of a potential Tech Bubble
“Alexa, has the Tech Bubble started?”
Our investment strategists recently warned against the risk of an overshoot in Tech,
noting that the longer it takes Central Banks to tighten, the greater the risk of Tech and
Growth stocks entering a speculative frenzy. Data on relative performance, valuation,
and flows are reminiscent to varying degrees of the early stages of a bubble:
• Market cap hegemony: Following the GFC, Tech stocks ousted Financials from
their top position in terms of market cap and now account for 23% of the S&P500,
the highest %-age from any single sector since the dotcom bubble (Chart 7).
• Dazzling growth vs. value outperformance: S&P 500 Growth stocks (SGX) on
aggregate cost ~1.4x as much as their Value counterparts (SVX), the largest
premium since the dotcom bubble (Chart 8). Notably, the S&P 500 Growth index is
dominated by Tech stocks, which account for 36% of its total market cap.
• Third longest streak of monthly gains: In May, the Nasdaq 100 recorded its
seventh consecutive monthly gain, the longest streak since 2009. Remarkably, the
index has managed to establish a longer streak only twice in its history, in 1986 (10
consecutive months) and in 1995 (8 months). The rally in these two episodes
ultimately came to an abrupt halt. However, the index would have substantial
further upside from current levels if it were to achieve similar gains (Chart 9).
• Lofty valuations: The valuation of Tech as measured by price to consensus forward
12M earnings expectations recently hit its highest value since Nov-07 and is
exhibiting signs of acceleration (Chart 10). However, Tech remains far cheaper than
its dotcom bubble highs.
• Irrational exuberance: Inflows to Tech funds are rising at their fastest annualized
rate (25% of AUM) in 15 years, a sign of renewed exuberance.
Chart 7: The last instance where a single sector dominated SPX market
cap as the Tech sector does now was the dotcom bubble era
35% Sector leadership in US equities
Chart 8: Growth has only been relatively more expensive vs. Value
during the peak of the dotcom bubble
1500
1.8
30%
1250
1.6
25%
20%
15%
1000
750
500
1.4
1.2
10%
250
1
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
0
0.8
Tech
Financials
Discretionary
Industrials
Staples
Energy
Largest sector weight in the S&P500
Current = 95th %-ile
Source: BofA Merrill Lynch Global Research. Monthly data from Jan-1990 to Jun-17.
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
A / B (RHS) S&P Value (SVX) (B) S&P Growth (SGX) (A)
Source: BofA Merrill Lynch Global Research. Daily data from 30-Jun-95 to 5-Jun-17
4 Global Equity Volatility Insights | 06 June 2017
Chart 9: In May, the Nasdaq recorded its longest streak of monthly gains
since 2009 (7M). However, compared to the only other instances of
longer streaks (‘86, ‘95) the current bull run is still only half the size
Longest Tech Bull Runs with calendar monthly returns
160
150
140
130
120
110
100
90
80
2.3%
5.3% -0.3%
1.4%
1.4% -0.8%
5.7%
6.0%
5.6%
4.1%
10.2%
-2.9%
4.9%
0.5%
-11.1%
5.0% 3.9%
3.7%
2.7%
4.2%
9.2%
4.4%
= 100 as of 30-Sep-85
6.7% 3.4%
0.3%
= 100 as of 30-Dec-94
1.1%
0.2%
5.2% 2.0%
= 100 as of 31-Oct-16
Sep-85
Nov-85
Dec-85
Jan-86
Feb-86
Apr-86
May-86
Jun-86
Jul-86
Jan-95
Mar-95
Apr-95
May-95
Jun-95
Aug-95
Sep-95
Oct-95
Nov-95
Source: BofA Merrill Lynch Global Research. Data from Sep-85 to 31-May-17
Nov-16
Dec-16
Jan-17
Feb-17
Apr-17
May-17
May-86 Bull Run Oct-95 Bull Run May-17 Bull Run
Chart 10: Tech valuations seem to be gaining momentum and are now at
their highest levels since before the GFC but remain far from dotcom
bubble peaks
60
50
40
30
20
10
0
1986
1987
1989
1991
1993
1994
1996
1998
2000
2001
2003
2005
2007
2008
2010
2012
2014
2015
SPX Tech P/E (price to consensus forward 12m earnings expectations)
Current
Source: BofA Merrill Lynch Global Research. Monthly data from Jan-86 to May-17.
In addition to strong price performance, lofty valuations, and exuberant inflows, asset
bubbles also tend to have two other hallmarks, best seen through the derivatives lens:
(i) asset volatility rising alongside asset prices (Charts 11 & 12), and (ii) declining
correlation as assets closest to the source of the bubble decouple from those farther
removed (Chart 11).
Chart 11: During the 2000s Tech Bubble, Tech vol rose with Tech stocks
and broader market correlations fell as Tech stocks decoupled from
other large caps – both classic signs of an asset bubble
70%
5000
60%
50%
4000
40%
3000
30%
2000
20%
10%
1000
0%
0
'95 '96 '97 '98 '99 '00 '01 '02 '03 '04
NDX 1Y realized vol
NDX (right)
SPX 1Y realized correl
Source: BofA Merrill Lynch Global Research. Daily data from 3-Jan-95 through 31-Dec-03.
SPX correlation = average pairwise realized correlation of all 500 stocks.
Chart 12: Historically, in major asset bubbles, realized volatility has
tended to rise meaningfully not only after the bubble deflates, but also
in the run-up to the market peak
Avg. 1M realized volatility
75%
65%
55%
45%
35%
25%
15%
Asset bubbles (peak):
* Dow Jones (Sep-29)
* Gold (Jan-80)
* Nikkei (Jan-90)
* Nasdaq 100 (Mar-00)
* HSCEI (Oct-07)
* Crude oil (Jul-08)
* Biotech (Jun-15)
-52
-48
-44
-40
-36
-32
-28
-24
-20
-16
-12
-8
-4
0
4
8
12
16
20
24
Source: BofA Merrill Lynch Global Research.
Weeks from peak
While Nasdaq 100 (NDX) implied volatility has spiked in recent weeks and now trades in
the 94 th percentile as a spread to S&P 500 (SPX) implied volatility (Chart 14), the
absolute level of NDX 3M implied vol remains historically low (2 nd percentile since Jun-
09). In our view, at least for now, the spread widening is more of a response to the
outsized sell-off seen in Tech stocks on 17-May rather than the volatility market trying
to price in the onset of another Tech Bubble. Indeed, the -2.5% drop in the NDX on 17-
May was a six standard deviation (6σ) event relative to trailing realized volatility (and the
fourth worst risk-adjusted daily return since 1985), even more extreme than the 5σ
decline experienced by the S&P.
Global Equity Volatility Insights | 06 June 2017 5
Chart 13: The -2.5% drop in the NDX on 17-May was a six standard
deviation (6σ) event relative to trailing realized volatility and the fourth
worst risk-adjusted daily return since 1985
6
4
2
0
-2
-4
-6
-8
-10
'85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 '17
Daily NDX return / trailing (EWMA) vol
17-May-17
Source: BofA Merrill Lynch Global Research. Daily data from 4-Feb-85 through 2-Jun-17.
EWMA = exponentially-weighted moving average realized volatility with lambda = 0.94.
Chart 14: The 6σ sell-off in the NDX on 17-May has helped drive shortdated
Tech implied vol higher relative to S&P vol, although the absolute
level of Tech vol still remains historically low
40%
35%
30%
25%
20%
15%
10%
5%
0%
NDX vol = 2nd %-ile
NDX-SPX vol spread = 94th %-ile
Jun-09 Jun-11 Jun-13 Jun-15 Jun-17
NDX 3M ATM implied vol
NDX - SPX 3M ATM implied vol spread (right)
Source: BofA Merrill Lynch Global Research. Daily data from 1-Jun-09 through 2-Jun-17.
16%
14%
12%
10%
8%
6%
4%
2%
0%
Hedge near-term reversal risk via FANG stock replacement or NDX put spreads
As we have previously noted, asset bubbles can be notoriously difficult to trade, as
fundamentals give way to chasing higher highs, and derivatives can be a key tool for
capturing asset price upside while mitigating reversal risk.
Chart 15: Proxy hedge screen for a Nasdaq 100 (NDX) benchmark suggests NDX is the best hedge for itself, as basis risk runs too high with other assets
Nov08 (-39%) Mar08 (-18%) Mar09 (-15%) Aug11 (-14%) Feb16 (-13%)
Jul06 (-13%) Jul10 (-12%) Aug15 (-10%) Nov12 (-10%) May12 (-9%)
ESTX50
NIKKEI
HYG
FTSE
TWSE
HSI
NIFTY
HSCEI
KOSPI
Aluminum
EEM US
TLT*
ASX200
RDXUSD
AUDUSD
GLD*
CADUSD
NZDUSD
Copper
EURUSD
USDJPY
BOVESPA
TOP40
Crude Oil
GBPUSD
S&P500
RTY
Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17. *Call option volatility used.
We continue to like hedging the risk of a US Tech overshoot via stock replacement
strategies, for example, stock replacing long “FANG” positions with either cheap calls on
the individual FANG stocks or with outperformance calls on FANG vs. S&P.
NDX
Average
-0.5 0.0 0.5 1.0 1.5 2.0 2.5
Estimated hedge benefit per unit cost vs. NDX
6 Global Equity Volatility Insights | 06 June 2017
For those who wish to remain fully invested and/or seek broader index-level hedges for
Tech positions, we suggest 3M put spreads on NDX for two reasons: (i) our cross-asset
hedging analysis (Chart 15) shows little value in proxy hedging Nasdaq 100 exposure,
even with relatively lower vol S&P options, as the basis risk has tended to be too high
historically for proxy hedging to be reliably beneficial; and (ii) compared to outright puts,
put spreads help limit long exposure to short-dated NDX implied volatility that is low but
not cheap (Chart 14).
Hedge inflation & deflation of a Tech Bubble via SPX 12M Top50 dispersion
Dispersion strategies can be particularly attractive hedges for asset bubbles as
idiosyncratic market moves generate high volatility (to which dispersion is positively
correlated) with a limited rise in correlation (to which dispersion is negatively
correlated). Importantly, as seen from Chart 11, this can occur both during the run-up to
the market peak as well as after the bubble pops. In other words, long vol dispersion
strategies can profit from both the inflation and deflation of an asset bubble, without
requiring an investor to time the top.
With the SPX Top50 largely dominated by Tech stocks (34% of total market cap) and
with average longer-dated single stock vol in the basket trading close to 3yr lows (12M
SPX Top50 ATMf implied vol is in its 2 nd %-ile since Jun-14, Chart 16), we recommend
investors go long 12M SPX Top50 dispersion. Chart 18 shows that such a strategy
would have recorded its best performance during the formation and subsequent
bursting of the dotcom bubble as volatility increased in tandem with falling correlation
(see Chart 11).
Importantly, while implied correlation continues trading in a new, lower range since the
US election, the spread to realized correlation has remained healthy with the SPX Top50
12M implied vs. 6M realized correlation spread in its 81 st %-ile over the past 3 years
(Chart 17). This makes selling the correlation premium (inherently embedded in long
dispersion strategies) attractive vs. history.
Chart 16: Average SPX Top50 single stock 12M ATMf implied vol is
depressed vs. history, in part driven by Tech market cap dominating the
index and Tech vol the 2 nd lowest across sectors on a historical basis
50%
40%
30%
20%
10%
0%
SPX Top50
Tech
Health Care
Discretionary
Staples
Financials
3yr %-ile of average 12m ATMf implied vol
Industrials
Source: BofA Merrill Lynch Global Research. Daily data from 5-Jun-14 to 5-Jun-17.
Energy
Sector market cap as a %-age of total SPX Top50 market cap
Telecom
Chart 17: Implied to realized correlation spread on the SPX Top50
basket is historically elevated, making selling the correlation premium
embedded in long dispersion strategies attractive
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17
SPX Top50: 12m ATMf implied vs. 6m realized correlation (A - B)
12m SPX Top50 ATMf implied correlation (A)
6m SPX Top50 realized correlation (B)
Current (81st %-ile)
Source: BofA Merrill Lynch Global Research. Daily data from 2-Jun-14 to 2-Jun-17.
Global Equity Volatility Insights | 06 June 2017 7
Chart 18: Long SPX Top50 dispersion strategies performed the best
during the dotcom bubble era, providing adequate convexity during
both its formation as well as its bursting
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Long dispersion provided better convexity vs. outright long vol position both
during the 'making' and the 'bursting' of the dotcom bubble
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2m SPX realized dispersion
2m SPX realized vol
Source: BofA Merrill Lynch Global Research. Daily data from 14-Mar-90 to 2-Jun-17
8 Global Equity Volatility Insights | 06 June 2017
Notable trends and dislocations (US)
Major US equity indices soar to all-time highs as the low vol regime persists
Friday marked the end of the second full week following the political turmoil on Wed,
17-May. Since then, volatility has once again collapsed (10d realized is at 4.6%) and the
S&P 500 term structure of volatility has steepened with the 3m-1m spread trading in
the 90 th 2y %-ile. Low S&P 500 short-dated vols pushed down the back end of the curve
(1y and beyond), while Russell 2000 1y+ vols remained bid (Chart 19). Last week, the VIX
printed 2 of its 15 closes below 10 since 1990 (Chart 20). Vol-of-vol remained
supported with the VVIX/VIX ratio setting yet another record (8.58) on Friday. All of this
happened as SPX, NDX and INDU finished the week at all-time highs.
Chart 19: In the trading sessions following the political turmoil and
ensuing volatility spike on 17-May, long-term vols (1y and above) reset
lower for SPX but remained bid for RTY
20%
18%
16%
14%
12%
10%
8%
6%
4%
1m 3m 6m 1y 1.5y 2y
RTY change (RHS) SPX change (RHS) SPX 17-May
SPX 1-Jun RTY 17-May RTY 1-Jun
Source: BofA Merrill Lynch Global Research.
20%
15%
10%
5%
0%
-5%
The political turmoil on 17-May caused short-term vols to reset
higher and the VIX jumped to 15.59 from 10.65 the prior day.
Short-term vols in turn moved the back end of the curve higher
with e.g. SPX (RTY) 1y vols trading higher by 1.05% (0.79%).
However, the agitation in equity markets was short-lived. The
front end of the curve collapsed over the subsequent trading
sessions and resulted in a very steep term structure for both
indices, similar to what we have become accustomed to over
the prior months.
By the end of last week, SPX long term vols (1y and beyond) had
moved to virtually the same levels where they traded prior to
the vol spike. RTY long-term vols, however, remain bid.
Chart 20: 2017 is already the 5 th calmest year for the VIX with 76 YTD
closes below 12. Despite the short-lived vol spike on 17-May, the VIX
had a very calm month of May, extending into June as it printed 6 out of
its 15 historic closes below 10
Number of VIX closes below 12
140
120
100
80
60
40
20
0
125
97
83 81
76
56
Average VIX level (RHS) Max VIX level (RHS)
Source: BofA Merrill Lynch Global Research, Bloomberg. Daily data from Jan-90 to 5-Jun-17.
40
35
21
7 6 6
'06 '95 '93 '05 '17 '94 '14 '07 '16 '92 '04 '13 '15
YTD
1
45
40
35
30
25
20
15
10
5
0
With only five months of the year behind us, the VIX has already
closed below 12 on 76 days. Since 1990, only 4 other years
have seen a larger number of trading sessions with the VIX
closing below 12.
Of the 15 trading sessions in VIX’s history since 1990 when the
index closed below 10, 6 were between May-17 and Jun-17. The
low short-dated implied vol is in part driven by realized vol; 10d
is at 4.5%, which is already subdued even for the current lowvol
regime (17th %-ile since the US election last November).
Global Equity Volatility Insights | 06 June 2017 9
Rates vol is near all-time lows and is favorable for positioning for a break-out
Since the US Election last November, the 10y US Treasury rate has fluctuated between
2.17% and 2.63%, constantly being jostled up or down by various economic forces. It is
currently trading towards the bottom of that range. Our rates strategists have a yearend
target of 2.85% for the 10y rate (just above the median forecast).
Long-term rates have remained low due to uncertainty around Fiscal policy (Trump’s
plans on infrastructure spending), subdued inflation expectations and a slower than
expected Fed hiking cycle. On the other hand, a near full-employment economy, hopes
for infrastructure spending, potential for higher inflation driven by energy prices &
increased government spending and an accelerated hiking cycle are providing a floor for
long-term rates. In the end, uncertainty remains and analysts’ estimates for the yearend
target vary widely between 1.6% and 3.7% (based on 59 forecasts with median and
mean of 2.8%).
For investors who believe that long-term rates will break out of their range we
recommend going long TLT 6m 35-delta strangles. The structure has rarely been
cheaper in history (Chart 22) and at present TLT 6m implied vol is 94bps below 6m
realized, with the spread at its lowest since Aug-15. A 3m version of the 35-delta
strangle prices just as attractively versus its history.
Chart 21: Rates volatility, as measured by the Merrill Option Volatility
Estimate index (MOVE) and by TLT (20+ year bond ETF) 3m ATMf vols,
are the lowest they have been all year and are very near the all-time
lows
300
250
200
150
100
50
0
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Jan-16
25%
20%
15%
10%
MOVE Index 2-Jun-17 TLT 3m ATMf vol 2-Jun-17
Source: BofA Merrill Lynch Global Research. Daily data from Jan-90 to Jun-17 for MOVE Index and Jun-
12 to Jun-17 for TLT vols.
5%
0%
Chart 22: With vol and skew in favor of the structure, the price of a TLT
6m 35d strangle is near all-time lows. Investors can go long the trade to
position for a break-out from the range
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
US Nov-16
Election
Jun-12
Oct-12
Feb-13
Jun-13
Oct-13
Feb-14
Jun-14
Oct-14
Feb-15
Jun-15
Oct-15
Feb-16
Jun-16
Oct-16
Feb-17
Jun-17
Price of TLT 6m 35-delta strangle 2-Jun-17 TLT (RHS)
Source: BofA Merrill Lynch Global Research. Daily data from Jun-12 to Jun-17.
150
130
110
90
70
50
30
10 Global Equity Volatility Insights | 06 June 2017
Chart 23: Steep put skew in FXB , the ETF underlying GBP, favors buying
downside protection via cheap put spreads against the odds of a hung
parliament outcome in the UK general election
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Jun-16
Jul-16
Aug-16
Sep-16
Oct-16
Nov-16
Dec-16
Jan-17
Feb-17
Mar-17
A - B 5d MA (RHS)
1m Sterling (FXB) 95% implied vol (A)
1m Sterling (FXB) ATMf implied vol (B)
Current
Apr-17
May-17
Source: BofA Merrill Lynch Global Research. Daily data from 5-Jun-16 to 6-Jun-17.
4%
3%
2%
1%
0%
The UK general election is scheduled to take place on Thu, 8-
Jun-17. When the election was called on 18-April, the polls
pointed to a landslide victory for the Conservative Party. This
boosted the UK’s currency as investors assumed that such an
outcome would lead to a “smoother” Brexit. Indeed, on that day
the Sterling (GBPUSD) recorded its third best daily performance
over the past 8 years.
However, while official polls still suggest an outright majority
for the Conservative Party, the odds of a hung parliament have
increased in recent weeks. As a consequence the boost in the
currency after the election was called has slightly faded. With
significant further downside room to its recent pre-rally lows
and FX markets complacent with prevailing opinion poll data,
there clearly could be a significant near-term correction in the
sterling if the probability of a hung parliament becomes reality.
Hence we favor hedging downside risk in sterling via cheap FXB
put spreads to lever steep put skew (3m 95%-ATMf implied vol
spread at its 1-yr 90 th %-ile).
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
2 Jun 17 26 May 17 Change
Current
ranking
Minimum 25% Median 75% Maximum
1-month ATM implied volatility 7.4% 7.6% -0.2% 0.1% 7.4% 10.0% 11.8% 14.5% 31.8%
1-year ATM implied volatility 13.8% 13.9% -0.1% 2.5% 13.4% 15.4% 16.2% 17.3% 22.5%
1-week intraday realized volatility 6.2% 6.1% 0.1% 3.7% 5.2% 8.5% 10.7% 14.0% 53.7%
1-year minus 1-month term structure 6.3% 6.3% 0.0% 97.8% -12.0% 2.7% 4.3% 5.4% 7.0%
3-month 90 minus 110 skew 7.9% 8.7% -0.8% 4.7% 7.1% 9.5% 11.3% 11.8% 13.8%
1-year top 50 implied correlation 45.42 45.85 -0.44 6.7% 42.03 49.79 54.34 57.14 65.55
3-month top 50 realized correlation 27.75 30.72 -2.97 24.4% 12.57 27.90 37.28 48.45 60.41
VIX 1-month ATMf implied vol 76.5% 75.9% 0.6% 20.4% 61.2% 77.9% 85.0% 95.2% 162.2%
VIX 1-month 110 minus 90 skew 28.4% 28.5% -0.1% 96.2% 9.3% 18.6% 21.5% 23.8% 30.3%
Source: BofA Merrill Lynch Global Research
Global Equity Volatility Insights | 06 June 2017 11
Volatility in Europe
Notable trends and dislocations (Europe)
European equities were mostly flat over the week with the notable exception of the DAX
which rallied 1.8% led by Bayer (which accounts for almost 10% of the index). In
contrast, the Russian RDXUSD dropped by 3.3% as oil prices continued to decline.
Short-dated (3M) implied vols dropped to 2y lows on the ESTX50, DAX and CAC which
helped push 12M-3M volatility term-structures to 2y highs on all three indices.
• The short 1xAug / long 2x Sep / short 1x Oct V2X futures fly jumped to 3.7v
on 31-May given speculation around early Italian elections. This is higher than
equivalent V2X flies at the same number of days to both the UK referendum and
the French elections. The current price is higher than 94% of the values of
historical flies 1d before the expiry of the earliest leg, suggesting it has ample
room to trade lower should political uncertainty abate by Aug.
• SX5E 2Y var convexity (var strike vs ATMf vol) has been driven lower by (A)
a decline in the Tail liquidity Risk Premium and (B) volatility skew becoming
more linear (i.e., less convex in strike)
• GBPUSD short-dated (1wk) implied has reached its 92nd 4yr percentile ahead of
the UK snap election on 8-Jun. It is however still at least 2.7v below the levels
witnessed ahead of previous well known political catalysts.
• DTE GY has run too fast, too quick: hedge a potential reversal using a Sep17
collar (+17put/-18 call) for 46bps to hedge losses greater than 2.9% while
retaining upside to 18 (near 15yr high of 18.05) by the Sep expiry
• Equity vs credit: Enel stock attractive vs CDS given cheap bullish risky &
high div yield vs CDS: Among 50 companies which have high dividend yields
relative to bond yields (as highlighted by BofAML credit and equity strategists),
we note that Enel’s projected 12m div yield is higher than its CDS and the price
of 3M bullish risk reversals are cheap (vs other names and vs a 5-year history).
ESTX50 Sep/Oct fwd vol rose as early Italian elections are (slightly) more likely
According to our economists, the agreement reached between major Italian parties on a
German-style proportional electoral law has made early elections more likely. They note
that the Italian press cite possible early election dates between 10-Sep and 22-Oct, i.e.,
almost entirely within the V2X Sep future’s volatility bucket (which also encompasses
German elections). This may in part be why the short 1xAug / long 2x Sep / short 1x Oct
V2X futures fly jumped to 3.7v on 31-May, which is higher than equivalent flies ahead of
both the UK referendum and recently concluded French elections (Chart 24). However,
our economists view an early vote within September as technically difficult.
12 Global Equity Volatility Insights | 06 June 2017
Chart 24: The V2X Aug17/Sep17/Oct17 futures fly reached 3.7v on 31-
May. This is higher than equivalent flies at the same number of days
before both the UK referendum and recently concluded French elections
16
14
12
10
8
6
4
2
0
-2
Italian/German election (Aug/Sep/Oct) fly
Italian referendum (Oct16/Nov16/Dec16) fly
UK referendum (May16/Jun16/Jul16) fly
French election (Mar/Apr/May) fly
120 110 100 90 80 70 60 50 40 30 20 10 0
Trading days to event
Source: BofA Merrill Lynch Global Research. Data: 8-Jan-16 to 5-Jun-17.
Chart 25: The V2X Sep17-Oct17 spread is actually significantly lower
than the equivalent UK referendum and French election spreads,
suggesting the majority of excess volatility is being priced in SX5E
Sep/Oct fwd vol
8
6
4
2
0
-2
Italian/German election (Sep-Oct) spread
Italian referendum (Nov16-Dec16) spread
UK referendum (Jun16-Jul16) spread
French election (Apr-May) spread
120 110 100 90 80 70 60 50 40 30 20 10 0
Trading days to event
Source: BofA Merrill Lynch Global Research. Data: 8-Jan-16 to 5-Jun-17.
Chart 26: The current price of the V2X Aug/Sep/Oct fly would have
overestimated the value of a 1d/26d/46d fly (i.e., equivalent to the
Aug/Sep/Oct fly 1d before the Aug expiry) 94% of the time since Jun-09
6
4
2
0
-2
-4
-6
French elections (~13 vols)
UK referendum (~4 vols)
The current price of the V2X Aug/Sep/Oct fly would have
overestimated the value of a 1d/26d/46d fly (i.e., equivalent
tenor to the Aug/Sep/Oct fly 1d before the Aug expiry) 94% of
the time since Jun-09. This suggests it has ample room to trade
lower should political uncertainty abate by Aug. However, if
instead implied risk becomes more concentrated in the 20-Sep
to 20-Oct period ahead of the Aug expiry (due to, say, political
developments in Italy or Germany increasing risk perception),
the fly would stand to gain considerably.
-8
'09 '10 '11 '12 '13 '14 '15 '16
Price of 1d / 26d / 46d fly* (equiv. of Aug/Sep/Oct fly 1d before Aug expiry)
Current price of Aug/Sep/Oct fly
Source: BofA Merrill Lynch Global Research. Data: 2-Jun-16 to 1-Jun-17. *Using constant maturity
futures.
Global Equity Volatility Insights | 06 June 2017 13
Chart 27: SX5E 2Y var convexity (var strike vs. ATMf vol) has been
driven lower by (A) a decline in the Tail liquidity Risk Premium and (B)
volatility skew becoming more linear (i.e., less convex in strike)
(A) VarSwap - 1dStrip TRP
(B) VarSwap - Linear skew approximation*
8%
(A) + (B)
VarSwap - ATMf vol
6%
4%
2%
We recently noted that ESTX50 long-dated (2Y) variance
convexity (var strike vs. ATMf vol) had declined considerably in
recent months. This has been driven by (A) a decline in the Tail
liquidity Risk Premium (as defined in our piece More to variance
swaps than meets the eye) and (B) volatility skew becoming
more linear (i.e., 80-90 skew being similar to 90-100 skew).
Both these components of variance convexity suggest that
long-dated ESTX50 tails (e.g., VarSwaps or far OTM puts) are
historically cheap vs. ATMf vol.
0%
Sep12
Jan13
May13
Sep13
Jan14
May14
Sep14
Jan15
May15
Sep15
Jan16
May16
Sep16
Jan17
May17
Source: BofA Merrill Lynch Global Research. Data: 21-Sep-16 to 31-May-17. *Linear approximation of
variance strike = ATMf vol squared x (1 + 3 x T x skew squared), where T is time to maturity and skew
= [ implied vol at strike 90 – implied vol at strike 100 ] / [ 90 – 100 ]. For more details see Derman’s
1999 paper: More than you ever wanted to know about volatility swaps.
Chart 28: GBPUSD short-dated (1wk) implied has reached its 92 nd 4yr
percentile ahead of the UK snap election on 8-Jun. It is, however, still at
least 2.7v below the levels witnessed ahead of previous known events.
35
30
25
20
15
10
Sep-14 Scottish
referendum
May-15 UK
general election
Jun-16
Brexit vote
Jan-17 Brexit
supreme court
rulling
Jun-17 snap
UK election
With the UK parliamentary elections less than one week away,
short-dated (1wk) implied vols on both the FTSE and GBPUSD
appear more elevated vs. history, compared to last week.
GBPUSD 1wk ATM vol is exhibiting some concern as it is
trading in its 92 nd 4yr percentile. It is, however, still at least 2.7v
lower than the same measure ahead of previous known political
events. In contrast, FTSE 1wk ATMf implied vol is still well
below 4yr median levels.
5
0
FTSE 100 1wk vol
GBPUSd 1wk vol
May-14
Aug-14
Nov-14
Feb-15
May-15
Aug-15
Nov-15
Feb-16
May-16
Aug-16
Nov-16
Feb-17
May-17
Source: BofA Merrill Lynch Global Research. Data from 5-Jun-13 to 5-Jun-17
Deutsche Tel has run too fast too quickly; hedge using a Sep17 +17P/-18C collar
BofAML equity telecom analysts have reiterated their recommendation to be cautious
on Deutsche Tel as the company may face regulatory hurdles in their T-Mobile merger.
Given the stock has outperformed European telcos (SXKP) by 15.1% over the past 1
year, investors who own the stock should consider hedging downside with a long DTE
GY Sep17 17 put, short DTE GY Sep17 18 call for 0.46%, in our view. Indeed, spending
0.46% to protect gains is attractive as the price of the structure has rarely been cheaper
(only 14% of the time since Jun-08, Chart 29). Moreover, Chart 30 illustrates that this
structure enables stock owners to protect from losses greater than 2.1% while retaining
3.6% upside potential if the stock rises to 18 (near its 15-year high) by the Sep expiry.
14 Global Equity Volatility Insights | 06 June 2017
Chart 29: DTE GY 3.5month +40delta put /-38 delta call collars
(equivalent to Sep17 +17 put /-18 call) are cheap relative to history
6%
5%
4%
3%
2%
1%
0%
DTE GY 3.5m 40d put - 38d call price (%)
The option price has been cheaper
only 14% of the time since Jun-08
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Dec-14
Jun-15
Dec-15
Jun-16
Dec-16
Source: BofA Merrill Lynch Global Research. Daily data from 2-Jun-08 to 5-Jun-17.
Chart 30: DTE collars enable stock owners to protect against losses
>2.9% while retaining upside to the stock’s ~15yr high (€18.05)
P&L
20%
15%
10%
5%
0%
-5%
-10%
-2.9%
-8.2%
16
Source: BofA Merrill Lynch Global Research. Data as of 5-Jun-17
Option trade (long Sep 17 put / short Sep 18 call)
DTE GY stock + option trade
DTE GY stock
Current stock price:
€17.42
15-year high in the stock price: €18.05
17
18
Deutsche Tel stock price on September expiry day
19
Enel stock attractive vs credit given cheap bullish risky & high div yield vs CDS
On 31-May-17, we recommended buying SX5E bullish risk reversals and selling IBOXX
HY TRS as a low carry / low risk trade with gearing to improving earnings and FCF. We
now look for similar opportunities at the single name level. Among the 50 companies
which have high projected 12m dividend yield relative to bond yields (as highlighted by
BofAML credit and equity strategists – Chart 9), we highlight a subset (15 names) where
we have option data since at least Jun-12 (last 5yrs). The names in the bottom-right
corner of Chart 31 indicate the cheapest 3m -25d put/+25delta call risk-reversals where
projected dividend yield is highest relative to the CDS spread. We note that:
• Royal Dutch Shell’s stock yield is attractive vs CDS: Shell’s projected 12m div
yield is 7.5% while its CDS is 52bps (0.5%), resulting in a div yield-CDS spread of
7.0%, the highest in our screen; this suggests value in Shell equity vs credit.
• Cheap bullish risk reversals in Enel and Iberdrola: 3m -25delta put/+25delta call
risk reversals in Enel and Iberdrola are the lowest across the 15 names in Chart 31.
Notably, bullish risk reversals in Enel are also particularly cheap versus history as
the price of 3m -95%f / +105%f bullish risk reversals is below its 5 th 5-y %-ile.
Global Equity Volatility Insights | 06 June 2017 15
Chart 31: Among the 50 names highlighted by BofAML equity & credit strategists, the 15 below have liquid options. Notably, Shell equity shows best value vs
CDS (highest div yield - CDS). Enel risk reversals price lowest across names & vs history (large bubble size denotes low %-ile of risk reversal price vs 5y history)
Current price of 3m -25d put / +25d call bullish risk reversal
-0.10%
-0.15%
-0.20%
Automobiles & Parts Oil & Gas Health Care Real Estate Telecommunications Utilities
VIE FP
Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17. *5-yr percentile of 3m 95%f-105%f bullish risk-reversals. **Projected dividend yield = implied 12m dividends/current stock price, where implied 12m
dividends are derived from mid-single stock dividend swap pricing.. This screen is not a recommended list either individually or as a group of stocks. Investors should consider the fundamentals of the companies and their
own individual circumstances/objectives before making any investment decisions
VOD LN
Highest div yield vs CDS
-0.25%
-0.30%
-0.35%
FP FP
UL NA
ORA FP BMW GY
GSK LN
ENGI FP
ENI IM
RDSA NA
Bubble size legend:
The bigger the bubble
the cheaper the risk
reversal versus history*
0%
-0.40%
-0.45%
-0.50%
Cheapest riskreversal
ENEL IM
DAI GY
IBE SQ
BT/A LN
REP SQ
50%
99%
-0.55%
2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5%
Projected 1y div yield** - CDS
Chart 32: Korean-issued SX5E-linked structured products in May17 fell
to €0.9bn from €1.3bn in Apr17
EUR bn
2.5
2.0
1.5
1.0
0.5
0.0
Issuance of SX5E structured products in South Korea
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
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
May-17
Source: BofA Merrill Lynch Global Research. Monthly Korean structured product issuance data from
Jan-14 to May-17
0.9
Chart 33: We estimate current vega outstanding from Korean-issued
SX5E-linked structured products sums up to €53mn vega and would
peak at €81mn vega should the SX5E fall to 2875 (all else equal)
Vega (€ Mn)
90
80
70
60
50
40
30
20
SX5E Vega (from Korean structured product issuance)
10
SX5E = 3592
0
2000 2500 3000 3500 4000 4500
Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17.
Max vega:
€81mn at ~2875
53
SX5E Dec18 div futures are high relative to Dec17 and BofAML div forecasts
SX5E Dec18 dividend futures are trading at €122.4 (6.8% higher than Dec17 dividend
futures), which is unusually high relative to history. Indeed, Chart 34 highlights that the
second DED future (currently Dec18) is at its highest level in 8 years relative to the first
(currently Dec17). Moreover, Dec18 div futures are trading only 1.5% below BofAML
fundamental bottom-up forecasts of 124.2 for 2018, suggesting low upside potential if
BofAML forecasts materialise (Chart 35).
16 Global Equity Volatility Insights | 06 June 2017
Chart 34: The SX5E DED2 future (currently SX5E Dec18 div future) is the
highest in 9-years relative to DED1
140
130
120
110
100
90
80
70
60
50
DED1 DED2 DED3 DED4 DED5
100%
90%
80%
70%
60%
Median
40%
30%
20%
10%
Current
Source: BofA Merrill Lynch Global Research. Data from 5-Jun-09 to 5-Jun-17. Historical values of DED1
are fixed at its current level of 116.6 and historical levels of DED2, DED3, DED4 and DED5 are rescaled
using historical their historical ratios to DED1 (DED2/DED1, DED3/DED1, DED4/DED1 and
DED5/DED1) as a multiplying factor.
Chart 35: The DED2 div future (122.4) is not heavily discounted vs
BofAML fundamental bottom-up forecasts (only 1.5% upside potential
versus forecasts)
ESTX50 realised dividends
150
Dividend futures
130.2
140
Consensus
124.2
BofAML
130
116.3
ESTX50 Div (index points)
120
110
100
90
80
70
89.0
89.3
83.4
71.4
83.3
99.0
121.9
146.5
158.6
Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17
115.2
112.8
124.3
115.6
109.8
114.1
114.9
118.4
59.1div
pts paid
in 2017
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Table 3: Volatility measures of major equity indices in the EMEA region (data as of 02-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 13.0% -0.4% 0% 6.1% -3.9% 3% 3.6% 0.4% 100% 7.1% -0.4% 18% 0.4%
FTSE 10.6% 0.4% 4% 4.2% -3.6% 3% 2.8% -0.1% 87% 5.3% -0.4% 2% 0.0%
DAX 12.2% -0.7% 0% 7.1% -0.8% 8% 3.8% 0.4% 100% 7.1% -0.6% 22% 1.8%
CAC 12.9% -0.3% 0% 6.1% -3.9% 3% 2.7% 0.3% 100% 7.2% 0.2% 18% 0.1%
SMI 11.5% 0.1% 4% 6.5% -4.6% 6% 2.1% 0.0% 94% 6.2% -0.1% 19% 0.0%
RDXUSD 24.7% 1.2% 14% 21.7% -7.3% 35% 1.4% -1.0% 80% 4.8% 0.1% 19% -3.3%
TOP40 15.1% 1.0% 5% 9.3% 3.9% 9% 2.3% -0.4% 65% 7.2% 0.5% 15% -2.1%
ISE30 19.6% -0.2% 1% 12.9% 0.6% 16% 3.5% -0.1% 86% 6.7% -0.1% 64% 1.4%
Source: BofA Merrill Lynch Global Research
European volatility: Sector snapshot
Table 4: Volatility measures and indicative option prices for major European sector indices (data as of 02-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) 10.5% -0.2% 1% 8.5% 0.6% -3 1% 17.1 2.0% -4 1% 4.9 -0.2% 2 85% 0.6%
SX6P (Utils) 11.7% -0.2% 1% 10.4% 0.7% -1 1% 13.8 2.3% -3 2% 4.4 -0.3% 1 100% -0.2%
SX7E (Banks) 23.0% 0.9% 3% 20.9% 1.9% 8 4% 5.3 3.6% 12 13% 2.8 -0.5% -7 40% -3.1%
SX7P (Banks) 19.8% 1.2% 12% 14.0% 1.6% 11 13% 6.4 3.3% 15 17% 3.0 -0.5% -8 60% -2.1%
SXAP (Auto) 17.3% -0.2% 2% 13.5% 1.3% -1 2% 7.4 3.1% -1 2% 3.2 -0.4% 0 54% 0.9%
SXDP (Health) 13.1% -0.6% 2% 8.6% 0.9% -7 2% 11.5 2.4% -14 2% 4.1 -0.2% 10 82% 1.6%
SXEP (Oil&Gas) 15.4% -0.2% 1% 12.5% 1.2% -1 2% 8.5 2.8% -1 1% 3.6 -0.3% -1 94% -2.2%
SXIP (Insur) 15.1% -0.3% 2% 8.6% 1.1% -2 3% 9.0 2.8% -3 6% 3.5 -0.5% -3 64% 0.8%
SXKP (Telecom) 14.9% -2.0% 1% 11.5% 1.1% -21 1% 9.4 2.7% -20 1% 3.7 -0.2% 2 98% -1.0%
SXNP (Indust) 16.1% -0.1% 6% 9.1% 1.2% 0 14% 8.3 2.8% -1 6% 3.6 0.0% 2 100% 1.5%
SXPP (Basic) 25.1% -0.4% 5% 18.5% 2.1% -3 6% 4.8 3.6% -1 9% 2.8 -0.2% -2 58% -1.4%
SXQP (Prsnl&HH Gds) 13.9% 3.2% 22% 6.4% 0.9% 34 21% 11.2 2.6% 53 25% 3.8 -0.5% -24 41% 0.7%
SXRP (Retail) 12.7% 0.1% 7% 7.8% 0.8% 1 5% 13.2 2.3% 3 6% 4.4 0.1% -3 96% -0.4%
SXTP (Trvl&Lsre) 13.7% -1.3% 6% 8.5% 0.9% -18 6% 10.8 2.6% -14 6% 3.9 -0.2% -4 55% 1.9%
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 | 06 June 2017 17
Volatility in Asia
Use best-of puts to cheaply hedge a reversal in the rally
BofAML global strategists note that the massive central bank liquidity supernova has
allowed the Wall Street bull to flare higher, led by uber "growth" (EM internet stock
returns annualizing 125%). In light of this, we feel that it is prudent that investors
protect gains as we think today’s low volatility environment remains highly fragile,
characterized by the below stats:
• The MSCI Asia Pac index is up for the 5 th consecutive month and is trading at multiyear
highs, while equity foreign inflows year-to-date are at the highest since 2004.
• Option delta-adjusted open interest for KOSPI2 and HSI are near a 4-year highs.
• The BofAML global Risk-Love investor sentiment measure is in euphoria, and
China’s nominal GDP is likely peaking. The Asian/EM EPS upgrade cycle is likely
rolling over.
Volatility of equity indices remains at post-GFC lows while markets continue to trend
higher. If the market were to realize a correction, we believe that indices would be
highly correlated, and hence we recommend buying a 14-Sep-2017 95% strike best-of
put on NKY/KOSPI2/HSI that costs 0.8%, a 45% discount to average vanilla puts.
Indicative pricing (As of 5-Jun-17, ref: NKY: 20170, KOSPI2: 307.33, HSI: 25874)
Buy a 14-Sep-2017 best-of 95% put on NKY/KOSPI2/HSI: 0.80%
Chart 36: Option positioning on KOSPI2 and HSI is near a 4-year high
120
100
80
60
40
20
0
29
KOSPI2 HSI NKY
Option Delta Adjusted OI (US$Bn) 4-year Percentile (%)
8
96
Chart 37: The 3-month 95% best of put on HSI/NKY/KOSPI2 has
significantly paid off during market corrections when correlation rose
35%
30%
25%
20%
15%
10%
5%
0%
Mar-08
Oct-08
May-09
Dec-09
Jul-10
Feb-11
Sep-11
Apr-12
Nov-12
Jun-13
Jan-14
Aug-14
Mar-15
Oct-15
May-16
Dec-16
Historical Payoff of 3M 95% best of put on HSI/NKY/KOSPI2
Source: BofA Merrill Lynch Global Research
Data as of 2-Jun-17
Source: BofA Merrill Lynch Global Research
18 Global Equity Volatility Insights | 06 June 2017
Chart 38: YTD equity inflows into EM Asia are at the highest levels since
2004
Chart 39: Similar to that of global markets, Asian volatility is at its most
depressed levels post-GFC
40
30
20
10
-
-10
-20
-30
15
8 9
14
-21
17
10
4
17
24 22 23
11
28
35%
30%
25%
20%
15%
10%
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
YTD Foreign Equity Inflow into EM (US$bn)
2015
2016
2017
Average 3M ATM Vol of HSI/KOSPI2/NKY Current (13.2%)
Source: BofA Merrill Lynch Global Research, Bloomberg. Data as of 2-Jun-17
Foreign inflows into Korea, Taiwan, India, Indonesia, the Philippines, and Malaysia
Source: BofA Merrill Lynch Global Research. Data from 2-Jan-12 to 2-Jun-17
Notable trends and dislocations (Asia)
Asian equity markets saw modest gains last week, led by Japan’s NKY index, which
increased 2.5% week-over-week. In fact, the index breached the 20,000 mark last Friday
for the first time since December 2015. Gains were driven by foreign inflows from
investors attracted to very strong corporate profits. Additionally, economic data from
last week indicated that Japan’s unemployment rate held at a two-decade low, and
capital spending during Q1 beat analyst estimates. The biggest contributor to last
weeks’ return was Fast Retailing Co Ltd (9983 JT), which added 3.9% week-over-week.
The company reported that same-store-sales for its Uniqlo stores rose 2.4% year-overyear
in May due to successful strategies during the Golden Week and Mother’s Day
holidays. After the NKY, last week’s second biggest gainer was Hong Kong’s HSI, which
added 1.1%. The leading name in the index was Geely Automobile Holdings (175 HK),
which jumped 19.8% week-over-week in response to optimism over its recent
acquisition of a 49.9% stake in Proton Holdings. Hong Kong’s HSCEI saw a similar return
as the index added 0.8% last week.
Next we turn to India, where the NIFTY gained 0.6% last week. The leading name in the
index was Aurobindo Pharma (ARBP IS), which increased 11.4% week-over-week in
response to an investor presentation which outlined the company’s plans to increase
collaboration across its global customer business. Elsewhere in Asia, Korea’s KOSPI
increased 0.3% week-over-week, Australia’s ASX added 0.6%, and Taiwan’s TWSE
gained 0.5%.
Asian term structures were unchanged week-over-week at 3.8% on average
• Asian 3m ATM volatility increased on average 0.1 vol point to 12.6% last week,
while 10 day realized vol fell on average 0.8 vol points to 8.6%. Notably, NIFTY’s
implied vol increased 0.7 vol points, the biggest increase in the region. On the other
hand, the HSCEI’s 10d realized vol saw the largest drop in the region, falling 5.1 vol
points week-over-week to 9.2%.
• On average, term structures among Asian indices remained unchanged at 3.8% last
week. The KOSPI 12M-1M term structure steepened the most, increasing 0.7 vol
points to 2.9%. On the other hand, India’s NIFTY saw the largest flattening as its
term structure flattened 0.5 vol point to 3.8%.
• Asian 3M 90-110% skews narrowed 0.2 vol points on average to 3.0%. Japan’s NKY
narrowed the most, decreasing 1.0 vol point to 5.0%.
Global Equity Volatility Insights | 06 June 2017 19
Chart 40: Volatility measures of major Asian indices (data as of 02-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% 0.3% 1.4% 5.4% -2.4% 0.3% 5.1% 0.4% 99.1% 2.3% -0.4% 19.9% 1.1%
HSCEI 15.7% 0.3% 1.8% 9.2% -5.1% 1.6% 4.3% 0.2% 93.6% 0.4% 0.0% 20.4% 0.8%
NKY 14.2% -0.2% 0.3% 10.7% 1.0% 13.4% 4.2% -0.4% 93.8% 5.0% -1.0% 59.4% 2.5%
KOSPI 200 12.8% -0.3% 34.5% 9.8% 2.6% 36.9% 2.9% 0.7% 44.8% 3.0% 0.2% 15.8% 0.3%
ASX 200 11.5% -0.1% 12.8% 8.5% -0.7% 20.5% 3.5% 0.3% 86.5% 6.3% -0.2% 20.1% 0.6%
NIFTY 10.5% 0.7% 0.7% 9.7% -2.2% 18.9% 3.8% -0.5% 74.0% 5.5% 0.1% 53.0% 0.6%
TWSE 10.7% 0.3% 8.2% 7.2% 1.5% 14.1% 2.9% -0.4% 72.6% -1.5% -0.1% 0.0% 0.5%
Source: BofA Merrill Lynch Global Research
Chart 41: Index correlation is generally further away from their 10-year
lows while index and stock vols are near their lows, except for ASX200
Percentile Since 2008
25%
20%
15%
10%
5%
0%
6%
0% 0% 0%
4%
20%
3%
2%
16%
9% 10%
22%
13%
6%
5%
HSI HSCEI NKY KOSPI2 AS51
3M Stock Vol 3M Index Vol Index Correlation
Except for the ASX200, Asian stock and index vols are more
depressed than index correlation
Today’s ultra-low Asian index realized volatility is largely driven
by depressed single stock realized volatility and low realized
correlation. Stock and index volatilities are generally more
depressed than index correlation. For instance, the KOSPI2 3-
month realized correlation (0.13) is the highest relative to its
history (at its 22 nd percentile since 2008) as foreign inflows
have pushed the index to an all-time high and have driven
correlation up. Korean market activities used to be dominated
by domestic sector rotation trades.
On the other hand, ASX200 correlation is relatively depressed as
the correlation between the banks and materials sectors has
broken down in recent months.
Source: BofA Merrill Lynch Global Research
US$3.6bn Korean auto-callable issuance in May-17, down 21% MoM
• Korean issuance fell 21% MoM to US$3.6bn in May-17, which is close to the
average monthly issuance of US$3.8bn since 2014. Products issued in Oct-16
(US$3.1bn) and Nov-2016 (US$3.4bn) have knocked out recently and rolled into
new products. However, the legacy HSCEI-linked products issued in May-15 were
struck at a very high HSCEI spot level and were not able to knock-out this month.
We think issuance may pick up in July and August as ~US$4.0bn of legacy products
may knock-out in Jul-17 with an average HSCEI knock-out level of 9665 (Chart 43).
• Issuance in KOSPI2-linked products (up from US$840mn to US$846mn) remained
steady in May-17; HSI-linked products fell 66% from US$360mn to US$120mn as
investors prefered HSCEI-linked products (which only fell from US$760mn to
US$700mn).
• SX5E-linked (US$1.0bn), KOSPI2-linked (US$846mn), HSCEI-linked (US$700mn),
and SPX-linked products (US$550mn) accounted for 86% of the May-17 issuance.
We estimate that structured product issuers are currently long US$10mn of KOSPI2
vega and US$89mn HSCEI vega respectively. The majority of the US$89mn HSCEI
outstanding vega came from the US$14bn of HSCEI-linked legacy products issued
between Apr-15 and Jul-15 that have not knocked-out.
20 Global Equity Volatility Insights | 06 June 2017
NKY Uridashi monthly issuance slightly picked-up in May-17
With NKY breaking above 19,500 in May and triggering some early knock-outs, Japanese
Uridashi issuance picked up towards the end of May to US$630mn. We estimate there
is now around US$7.9bn (vs. $8.1bn last month) in product outstanding and over 50% of
it will be knocked out if the NKY rallies above 20,500. We estimate issuers are currently
long US$44mn vega in NKY. The peak of the vega profile is around the 17,500 level and
we expect issuers to lose US$2mn of vega for every 1% rally in the NKY.
Chart 42: Korean auto-callable issuance fell 21% to US$3.6bn in May-17; Issuance in KOSPI2-linked products (rose from US$840mn to US$846mn) remained
steady; HSI-linked products fell 66% from US$360mn to US$120mn as investors prefered HSCEI-linked products (which only fell from US$760mn to
US$700mn)
USD Mn
3,000
2,500
2,000
1,500
1,000
500
-
May15
Jun15
KOSPI2 HSCEI SX5E SPX HSI NKY Total issuance (RHS)
Jul15
Aug15
Sep15
Oct15
Nov15
Dec15
Jan16
Feb16
Mar16
Apr16
May16
Jun16
Jul16
Aug16
Sep16
Oct16
Nov16
Dec16
Jan17
Feb17
Mar17
Apr17
May17
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
USD Mn
Source: BofA Merrill Lynch Global Research. From May-15 to May-17
Chart 43: Knock-out schedule for legacy HSCEI-linked products issued in
2015; we expect more knock-outs in Jul-17 if HSCEI stays above 9,600
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
11,024
9,665
3,582 3,947
- - - -
Source: BofA Merrill Lynch Global Research. Data as of 2-Jun-17
11,491 11,341
3,165 3,261
Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17
Average HSCEI Knock-Out Level
Notional (US$mn)
Chart 44: In May-17, there was $630mn of Uridashi products issued
which were NKY linked
Issuance (US$bn)
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
-
Jan-15
May-15
New NKY Linked Uridashi issuance
NKY Index
Sep-15
Jan-16
May-16
Sep-16
Jan-17
May-17
Source: BofA Merrill Lynch Global Research. Monthly data from Jan-15 through May-17
22,000
21,000
20,000
19,000
18,000
17,000
16,000
15,000
14,000
NKY l d
Global Equity Volatility Insights | 06 June 2017 21
Chart 45: We estimate that structured product issuers are currently long
US$10mn of KOSPI2 vega
90
KOSPI2 Autocall Vega Outstanding Profile
Estimate KOSPI2 outstanding vega
(US$mn)
80
70
60
50
40
30
20
10
-
190
200
210
220
230
240
250
260
270
280
290
300
310
320
330
Source: BofA Merrill Lynch Global Research.
KOSPI2 Spot Level
Chart 46: Structured product issuers are currently long ~US$89mn of
HSCEI vega
Estimate HSCEI outstanding vega
(US$mn)
110
100
90
80
70
60
50
40
30
20
10
-
-10
-20
6500
7000
7500
8000
8500
9000
9500
10000
10500
11000
11500
12000
12500
13000
Source: BofA Merrill Lynch Global Research.
HSCEI Autocall Vega Outstanding Profile
HSCEI Spot Level
KOSPI2 3M ATM IV over SPX is at its 4-year high
Table5 lists Asian index pairs with the highest IV ratio vs their 4-year histories. For
instance, the ratio of KOSPI2 3M ATM IV over SPX is at its 4-year high.
Chart 47: The ratio of KOSPI2 3M ATM IV over SPX is at its 4-yr high
(Daily data from 1-Oct-12 through 02-Jun-17)
Implied Vol
25%
20%
15%
10%
5%
Jan-13
KOSPI2 3M ATM vol SPX 3M ATM vol Vol ratio
1.60
1.50
1.40
1.30
1.20
1.10
1.00
0.90
0.80
0.70
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
Ratio
Table 5: Index pairs^ with the highest implied vol ratio vs their histories
(data as of 02-Jun-17)
Index A Index B A/B Implied
Ratio 4-yr
percentile
(Implied vol) (Implied Vol) Vol ratio
3M ATM KOSPI2 (12.8%) SPX (9.4%) 1.36 100%
6M ATM KOSPI2 (13.6%) NIFTY (11.8%) 1.16 99%
12M ATM KOSPI2 (14.8%) NIFTY (13.8%) 1.07 99%
3M 25d-Put KOSPI2 (13.6%) HSCEI (16.4%) 0.83 99%
6M 25d-Put KOSPI2 (14.7%) NIFTY (12.5%) 1.17 99%
12M 25d-Put KOSPI2 (16.0%) NIFTY (14.4%) 1.11 99%
3M 25d-Call KOSPI2 (12.6%) SX5E (11.6%) 1.09 100%
6M 25d-Call KOSPI2 (13.4%) NIFTY (10.8%) 1.25 100%
12M 25d-Call KOSPI2 (14.6%) NIFTY (12.0%) 1.21 100%
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
22 Global Equity Volatility Insights | 06 June 2017
Summary of Open Trades (5-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 6: Summary of open trades as of 5-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%
Dec-18 expiry
Expected Trade
Rationale
Term
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
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
Buy an EWZ Jun-17 40 call conditional on SPX<2200 at expiry 24-Oct-16 1.7% Jun-17 expiry Using derivatives to capture Brazil (EWZ) upside potential following start of easing cycle
Buy an SX5E Sep-17 95% put conditional on EUR 10Y CMS > 1.1% or <
0.3% in Mar-17
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
Buy SPX Jun17 95% put contingent on US 5Y CMS > 2.15 5-Dec-16 1.04% Jun-17 expiry
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%
5-Dec-16 2.10% Jun-17 expiry
5-Dec-16 2.30% 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
Still depressed equity-bond correlation (US 5Y bonds vs. SPX in the 37th%-ile since Jun-88)
cheapens the cost of SPX puts conditioned on higher rates
Participate in the continuation of the reflation trade. Cheapen Financials upside by selling rich
Utilities and Staples vol & expensive correl.
Higher US rates and stronger dollar are likely to hurt companies exposed to EM and help US DM.
Trade the outperformance in a risk-controlled way, avoiding
selling the record-low correlation
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 Insurances are the most leveraged sector
Buy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% Jun-17 expiry Banks and Insurances 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 QQQ Jun17 132 call , sell XLF Jun17 25 call 20-Mar-17 0.57% Jun-17 expiry Sell rich Financials vol to fund cheap Tech upside
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 cheap 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 cheap 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 cheap 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 unloved and cheap biotech upside by levering depressed vol & skew
Global Equity Volatility Insights | 06 June 2017 23
Table 6: Summary of open trades as of 5-Jun-17
Open Open Expected Trade
Trade Description
Rationale
Date Level Term
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 the China tech bubble; Tencent unlikely to stand still 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
Buy 6m ATM calls on FB, AMZN, NFLX and GOOGL
30-May-17 1.17%
6.9%
(FB),
7.2%
(AMZN),
30-May-17 6m
9.4%
(NFLX),
6.2%
(GOOGL)
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
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
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”.
24 Global Equity Volatility Insights | 06 June 2017
Summary of Closed Trades (5-Jun-17)
Table 7: Summary of closed trades as of 5-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 | 06 June 2017 25
Table 7: Summary of closed trades as of 5-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
26 Global Equity Volatility Insights | 06 June 2017
Table 7: Summary of closed trades as of 5-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
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 | 06 June 2017 27
Volatility in Numbers (02-Jun-17)
Table 8: 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 9.5% 13.0% 10.6% 12.2% 14.2% 12.4% 12.8% 13.8% 16.5% 13.4% 16.1% 17.3% 15.9% 14.8%
%tile (2yr) 0.2% 0.0% 3.8% 0.0% 0.8% 2.6% 37.9% 2.6% 2.9% 5.7% 0.8% 3.9% 6.3% 32.4%
1Week Change -0.1% -0.4% 0.4% -0.7% -0.2% 0.3% -0.3% -0.1% 0.1% 0.3% -0.3% 0.0% 0.2% 0.1%
1Mth Change -0.6% -1.4% 0.1% -1.3% -0.7% 0.0% 0.9% 0.3% 0.0% 0.5% -0.4% -0.2% 0.7% 1.6%
Realised 7.3% 11.1% 9.1% 10.0% 12.5% 10.3% 11.0% 9.6% 16.8% 12.7% 15.8% 19.8% 13.7% 11.5%
%tile (2yr) 13.9% 11.8% 10.3% 1.0% 2.4% 0.6% 24.3% 1.6% 0.0% 0.0% 0.2% 14.7% 0.2% 24.5%
1Week Change -0.4% -0.7% -0.6% -0.7% 0.1% -0.2% 0.1% 0.0% -0.3% 0.0% -0.1% 0.0% -0.1% 0.0%
1Mth Change 0.4% -0.7% -0.2% -1.4% -0.4% -0.4% 2.4% -0.2% -0.7% -0.3% -0.5% -0.6% -0.4% 0.4%
Imp-real spread 2.3% 1.9% 1.4% 2.3% 1.7% 2.2% 1.8% 4.1% -0.2% 0.8% 0.3% -2.5% 2.2% 3.3%
Spread %tile (2yr) 51.4% 53.4% 61.9% 63.3% 67.8% 69.9% 64.4% 81.5% 79.8% 73.3% 79.6% 61.2% 88.0% 72.9%
1Week Change 0.3% 0.3% 1.0% 0.0% -0.3% 0.5% -0.4% -0.2% 0.3% 0.3% -0.2% 0.0% 0.3% 0.1%
1Mth Change -1.0% -0.6% 0.3% 0.1% -0.4% 0.4% -1.4% 0.5% 0.6% 0.9% 0.1% 0.4% 1.1% 1.2%
90-110 skew 7.9% 7.1% 5.3% 7.1% 5.0% 2.3% 3.0%
%tile (2yr) 4.6% 16.9% 1.1% 21.5% 19.0% 6.5% 2.7%
1Week Change -0.9% -0.4% -0.4% -0.6% -1.0% -0.4% 0.2%
1Mth Change 0.3% 0.8% -1.5% -0.4% -0.4% -0.7% -1.4%
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 6.6% 5.8% 4.6% 7.1% 11.1% 7.1% 10.6% 4.2% 3.6% 2.8% 3.8% 3.2% 3.5% 2.0%
%tile (2yr) 21.8% 2.1% 0.6% 6.7% 16.3% 0.4% 46.2% 99.6% 100.0% 86.2% 100.0% 99.6% 98.9% 53.1%
1Week Change -4.3% -4.1% -3.2% -0.6% 1.9% -0.9% 2.4% 0.0% 0.4% -0.1% 0.4% 0.2% -0.1% 0.4%
1Mth Change -1.0% -14.4% -12.7% -10.5% -1.4% -4.8% 0.3% 0.9% 1.3% 0.4% 0.9% 0.5% 0.7% 0.6%
Cash index
Current Level 2,439.07 3,591.82 7,547.63 12,822.94 20,177.28 25,924.05 307.83
1Wk Change 0.96% 0.36% 0.00% 1.75% 2.49% 1.11% 0.28%
1Mth Change 2.00% 0.38% 4.10% 2.52% 3.76% 4.97% 6.28%
Source: BofA Merrill Lynch Global Research
Table 9: 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 15.4% 25.3% 24.7% 15.1% 19.0% 24.4% 26.1% 17.4%
%tile (2yr) 4.0% 52.5% 13.4% 4.2% 6.9% 41.4% 12.1% 1.4%
1Wk Change -0.1% 0.5% 1.2% 1.0% 0.3% 0.6% 0.2% 0.6%
1Mth Change 0.8% 4.5% 1.0% 0.2% 1.6% 1.6% 0.3% -0.6%
Realised 13.3% 26.3% 21.8% 10.9% 18.0% 22.9% 21.4% 14.9%
%tile (2yr) 8.1% 70.1% 31.4% 1.0% 13.3% 9.7% 2.0% 0.6%
1Wk Change -0.8% -0.2% 0.0% 0.1% 0.0% 0.1% 0.0% 0.0%
1Mth Change 0.8% 7.6% 2.1% -1.2% -0.3% 1.6% 0.0% -0.4%
Imp-real spread 2.2% -1.0% 2.9% 4.2% 1.1% 1.5% 4.7% 2.5%
Spread %tile (2yr) 65.3% 24.4% 37.2% 76.4% 58.9% 67.9% 96.4% 44.1%
1Wk Change 0.6% 0.8% 1.2% 0.9% 0.3% 0.5% 0.2% 0.6%
1Mth Change 0.1% -3.0% -1.1% 1.4% 1.9% 0.0% 0.3% -0.2%
90-110 skew 6.0% 4.9% 4.8% 7.2%
%tile (2yr) 1.1% 28.7% 18.8% 14.6%
1Wk Change -0.5% 0.5% 0.1% 0.5%
1Mth Change -0.4% -0.9% 0.4% 0.7%
10-day realised
12M - 3M term vol spread
EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40
Current Level 13.1% 17.7% 21.2% 10.0% 3.6% -0.9% 1.4% 2.3%
%tile (2yr) 23.0% 24.4% 31.8% 9.8% 98.7% 24.7% 79.9% 64.8%
1Wk Change -4.1% -32.0% -6.4% 5.0% 0.5% 0.0% -1.0% -0.4%
1Mth Change 1.2% -1.9% 8.2% -3.2% 0.7% -2.9% -0.8% -0.8%
Cash index
Current Level 41.76 62,510.70 1,189.17 46,522.53
1Wk Change 0.05% -2.46% -3.33% -2.13%
1Mth Change 2.91% -6.31% -6.17% -1.31%
Source: BofA Merrill Lynch Global Research
28 Global Equity Volatility Insights | 06 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
Price objective basis & risk
Deutsche Telekom (DTEGF / DTEGY, B-2-7, EUR17.42/US$19.45)
Our price objective for DT is EUR18.0/sh (US$19.62) and is derived from our Sum-ofthe-Parts
analysis.
Each business is valued via DCF (except MtM for TMUS and OTE ) using a 7.0% WACC
and 1.00% terminal growth rate for Domestic and Western Europe assets (and 8.0%
WACC/1% term growth for Eastern Europe assets) and cross-checked using implied
valuation multiple analysis.
Our Domestic business valuation reflects DT's solid positioning in both fixed (FTTC
rollout) and mobile (superior network quality, integrated business model).
Upside risks to our PO are any asset sales (US, non-integrated assets in Austria or NL)
and revenue upside from T-Home's TV push.
Downside risks to our PO are higher than expected mobile impact coming from new
Drillisch tariffs or failure to turnaround good US operational trends into more profitable
revenue streams.
Analyst Certification
We, Benjamin Bowler, Clovis Couasnon and Frederic Boulan, CFA, hereby certify that the
views each of us has expressed in this research report accurately reflect each of our
respective personal views about the subject securities and issuers. We also certify that
no part of our respective 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 Advisor to Royal Dutch Shell PLC in
connection with its proposed sale of its UK North Sea assets to Chrysaor LTD, which
was announced on January 31, 2017.
Global Equity Volatility Insights | 06 June 2017 29
EMEA - Telecoms Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
RVW
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
BT BT BT US Sunil P. Patel
BT BTGOF BT/A LN Sunil P. Patel
DNA Oyj XDNAF DNA FH Sunil P. Patel
Iliad ILIAF ILD FP Frederic Boulan, CFA
Inwit XISWF INW IM Parin Shah, CFA
KPN KKPNF KPN NA Frederic Boulan, CFA
Orange FNCTF ORA FP Frederic Boulan, CFA
Orange ORAN ORAN US Frederic Boulan, CFA
TDC A/S TDCAF TDC DC Sunil P. Patel
Tele Columbus XBTLF TC1 GR Sunil P. Patel
Telecom Italia -RSP TIAJF TITR IM David Wright
Telecom Italia SPA TI TI US David Wright
Telecom Italia SPA TIAOF TIT IM David Wright
Telefonica SA TEFOF TEF SM David Wright
Telefonica SA TEF TEF US David Wright
Telenet Group Holding NV TLGHF TNET BB David Wright
Telenor TELNF TEL NO Sunil P. Patel
Telenor TELNY TELNY US Sunil P. Patel
Bouygues BOUYF EN FP Frederic Boulan, CFA
Deutsche Telekom DTEGY DTEGY US Frederic Boulan, CFA
Deutsche Telekom DTEGF DTE GR Frederic Boulan, CFA
Liberty Global LBTYA LBTYA US David Wright
Orange Belgium MBSRF OBEL BB David Wright
SFR Group SA NUMCF SFR FP Frederic Boulan, CFA
Swisscom SWZCF SCMN VX Frederic Boulan, CFA
Swisscom SCMWY SCMWY US Frederic Boulan, CFA
Telia Company TLSNF TELIA SS Sunil P. Patel
Vodafone Group VOD VOD US David Wright
Vodafone Group VODPF VOD LN David Wright
Cellnex XWHXF CLNX SM Parin Shah, CFA
Ei Towers EITOF EIT IM Parin Shah, CFA
Elisa ELMUF ELISA FH Sunil P. Patel
Proximus BGAOF PROX BB David Wright
RAI Way XRWSF RWAY IM Parin Shah, CFA
TalkTalk TLKTF TALK LN Sunil P. Patel
Tele2 AB TLTZF TEL2B SS Sunil P. Patel
Telefonica Deutschland TELDF O2D GR Frederic Boulan, CFA
Altice NV -A ALLVF ATC NA Frederic Boulan, CFA
Altice NV -B ALVVF ATCB NA Frederic Boulan, CFA
Drillisch AG DRHKF DRI GY Frederic Boulan, CFA
United Internet AG UDIRF UTDI GY Frederic Boulan, CFA
30 Global Equity Volatility Insights | 06 June 2017
EMEA - Utilities Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
RSTR
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
EDF ECIFF EDF FP Peter Bisztyga
EDP EDPFY EDPFY US Harry Wyburd
EDP ELCPF EDP PL Harry Wyburd
EDP Renovaveis EDRVF EDPR PL Pinaki Das
Enel ESOCF ENEL IM Harry Wyburd
Engie ENGQF ENGI FP Peter Bisztyga
Gamesa GCTAF GAM SM Pinaki Das
Iberdrola IBDSF IBE SM Peter Bisztyga
innogy XISAF IGY GR Peter Bisztyga
National Grid NGGTF NG/ LN Fraser McLaren
National Grid NGG NGG US Fraser McLaren
Red Electrica RDEIF REE SM Harry Wyburd
Saeta Yield XSTAF SAY SM Pinaki Das
Senvion SA XSHVF SEN GR Pinaki Das
Suez SZEVF SEV FP Pinaki Das
Terna TERRF TRN IM Harry Wyburd
Veolia VEOEF VIE FP Pinaki Das
Veolia VEOEY VEOEY US Pinaki Das
Vestas VWSYF VWS DC Pinaki Das
Acciona ACXIF ANA SM Pinaki Das
Drax Group Ltd DRXGF DRX LN Fraser McLaren
E.ON ENAKF EOAN GR Peter Bisztyga
E.ON EONGY EONGY US Peter Bisztyga
Gas Natural Fenosa GASNF GAS SM Harry Wyburd
Italgas XXYZF IG IM Harry Wyburd
Nordex NRDXF NDX1 GR Pinaki Das
RWE RWNFF RWE GR Peter Bisztyga
RWE RWEOY RWEOY US Peter Bisztyga
SSE SSEZF SSE LN Fraser McLaren
SSE SSEZY SSEZY US Fraser McLaren
Uniper XUIKF UN01 GY Peter Bisztyga
Centrica CPYYF CNA LN Fraser McLaren
Centrica CPYYY CPYYY US Fraser McLaren
DONG Energy XDJBF DENERG DC Pinaki Das
Enagas ENGGF ENG SM Harry Wyburd
Endesa ELEZF ELE SM Harry Wyburd
Fortum FOJCF FORTUM FH Peter Bisztyga
Pennon PEGRF PNN LN Fraser McLaren
Severn Trent SVTRF SVT LN Fraser McLaren
Snam SNMRF SRG IM Harry Wyburd
United Utilities UUGWF UU/ LN Fraser McLaren
Abengoa B AGOAF ABG/P SM Pinaki Das
Global Equity Volatility Insights | 06 June 2017 31
EMEA - Integrated & Refiners Coverage Cluster
Investment rating
BUY
NEUTRAL
UNDERPERFORM
Company
BofA Merrill Lynch
ticker Bloomberg symbol Analyst
Eni E E US Hamish Clegg
Eni EIPAF ENI IM Hamish Clegg
Galp Energia GLPEF GALP PL Hamish Clegg
Royal Dutch Shell B RDSB RDS/B US Christopher Kuplent
Royal Dutch Shell B RYDBF RDSB LN Christopher Kuplent
Royal Dutch Shell PLC Shs A RDSA RDS/A US Christopher Kuplent
Royal Dutch Shell PLC Shs A RYDAF RDSA LN Christopher Kuplent
Statoil STOHF STL NO Hamish Clegg
Statoil STO STO US Hamish Clegg
BP plc BP BP US Christopher Kuplent
BP plc BPAQF BP/ LN Christopher Kuplent
Repsol REPYY REPYY US Hamish Clegg
Repsol REPYF REP SM Hamish Clegg
Total TTFNF FP FP Christopher Kuplent
Total TOT TOT US Christopher Kuplent
Neste NTOIF NESTE FH Georgia Harris
OMV OMVJF OMV AV Hamish Clegg
OMV OMVKY OMVKY US Hamish Clegg
Disclosures
Important Disclosures
DTEGF Price Chart
1-Jun N
Ristimaki
PO:EUR12
21
18
15
12
9
6
3
0
DTEGF
4-Nov B
Boulan
PO:EUR13
9-Dec
PO:EUR15
29-Jan
PO:EUR18
7-Dec
PO:EUR19
23-Feb
PO:EUR18
5-May
PO:EUR19
13-Dec
PO:EUR20
12-Jan N
PO:EUR19
1-Jan-15 1-Jan-16 1-Jan-17
Review Restricted No Coverage
6-Mar
PO:EUR18
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of May 31, 2017 or such later date as indicated.
32 Global Equity Volatility Insights | 06 June 2017
DTEGY Price Chart
1-Jun N
Ristimaki
PO:US$15
21
18
15
12
9
6
3
0
DTEGY
4-Nov B
Boulan
PO:US$16
9-Dec
PO:US$18
9-Jan
PO:US$17
2-Mar
PO:US$20
29-Jan
PO:US$21
7-Dec
PO:US$21
23-Feb
PO:US$20
5-May
PO:US$21
31-Aug
PO:US$22
13-Dec
PO:US$21
12-Jan N
PO:US$20
1-Jan-15 1-Jan-16 1-Jan-17
Review Restricted No Coverage
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of May 31, 2017 or such later date as indicated.
ESOCF Price Chart
4.90
4.20
3.50
2.80
2.10
1.40
0.70
0.00
ESOCF
13-Jan B
Wyburd
PO:EUR4.35
27-Feb
PO:EUR4.70
23-Mar
PO:EUR5.00
3-Sep
PO:EUR4.95
25-Jan
PO:EUR4.75
1-Jan-15 1-Jan-16 1-Jan-17
Review Restricted No Coverage
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of May 31, 2017 or such later date as indicated.
IBDSF Price Chart
26-Nov B
Franco
PO:EUR6.60
15-Dec
PO:EUR7.40
19-Feb
PO:EUR7.10
15-Dec
PO:EUR6.80
8.00
6.00
15-Mar
Bisztyga
4.00
2.00
0.00
IBDSF
1-Jan-15 1-Jan-16 1-Jan-17
Review Restricted No Coverage
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of May 31, 2017 or such later date as indicated.
Global Equity Volatility Insights | 06 June 2017 33
RYDAF Price Chart
1-Jun N
Kuplent
PO:2420p
21-Jul
PO:2460p
28
24
20
16
12
8
4
0
RYDAF
9-Sep
PO:2550p
31-Oct
PO:2550p
25-Nov
PO:2520p
5-Dec
PO:2400p
15-Oct 11-Dec
PO:2500pPO:2315p
16-Jan
PO:2180p
16-Feb B
PO:2135p
5-May
PO:2000p
27-May
PO:1950p
8-Jun
PO:2050p
15-Jul
PO:2350p
29-Jul
PO:2230p
19-Oct
PO:2380p
9-Dec
PO:2400p
24-Jan
PO:2420p
1-Jan-15 1-Jan-16 1-Jan-17
Review Restricted No Coverage
3-Feb
PO:2490p
10-Mar
PO:2500p
11-May
PO:2400p
5-May
PO:2530p
B: Buy, N: Neutral, U: Underperform, PO: Price Objective, NA: No longer valid, NR: No Rating
The Investment Opinion System is contained at the end of the report under the heading "Fundamental Equity Opinion Key". Dark grey shading indicates the security is restricted with the opinion suspended. Medium grey
shading indicates the security is under review with the opinion withdrawn. Light grey shading indicates the security is not covered. Chart is current as of May 31, 2017 or such later date as indicated.
Equity Investment Rating Distribution: Energy Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 109 49.77% Buy 84 77.06%
Hold 52 23.74% Hold 43 82.69%
Sell 58 26.48% Sell 34 58.62%
Equity Investment Rating Distribution: Telecommunications Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 78 52.00% Buy 53 67.95%
Hold 30 20.00% Hold 20 66.67%
Sell 42 28.00% Sell 14 33.33%
Equity Investment Rating Distribution: Utilities Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 60 48.39% Buy 39 65.00%
Hold 35 28.23% Hold 26 74.29%
Sell 29 23.39% Sell 17 58.62%
Equity Investment Rating Distribution: Global Group (as of 31 Mar 2017)
Coverage Universe Count Percent Inv. Banking Relationships* Count Percent
Buy 1578 51.33% Buy 979 62.04%
Hold 690 22.45% Hold 434 62.90%
Sell 806 26.22% Sell 381 47.27%
* Issuers that were investment banking clients of BofA Merrill Lynch or one of its affiliates within the past 12 months. For purposes of this Investment Rating Distribution, the coverage universe includes only stocks. A
stock rated Neutral is included as a Hold, and a stock rated Underperform is included as a Sell.
FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential
price fluctuation, are: A - Low, B - Medium and C - High. INVESTMENT RATINGS reflect the analyst’s assessment of a stock’s: (i) absolute total return potential and (ii)
attractiveness for investment relative to other stocks within its Coverage Cluster (defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total
return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than
Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12
month total return expectation for a stock and the firm’s guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be
referenced to better understand the total return expectation at any given time. The price objective reflects the analyst’s view of the potential price appreciation (depreciation).
Investment rating Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster*
Buy ≥ 10% ≤ 70%
Neutral ≥ 0% ≤ 30%
Underperform N/A ≥ 20%
* Ratings dispersions may vary from time to time where BofA Merrill Lynch Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9 - pays
no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock’s
coverage cluster is included in the most recent BofA Merrill Lynch report referencing the stock.
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.
One or more analysts responsible for covering the securities in this report owns options on the financial instrument
The issuer is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Deutsche Telekom, Enel SpA, Iberdrola, Royal Dtch Shell.
MLPF&S or an affiliate has received compensation from the issuer for non-investment banking services or products within the past 12 months: Deutsche Telekom, Enel SpA, Iberdrola, Royal
Dtch Shell.
The issuer is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Deutsche Telekom, Enel SpA, Iberdrola, Royal Dtch Shell.
In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale: Deutsche Telekom, Enel
SpA, Iberdrola.
MLPF&S or an affiliate has received compensation for investment banking services from this issuer within the past 12 months: Deutsche Telekom, Enel SpA, Iberdrola.
34 Global Equity Volatility Insights | 06 June 2017
MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer or an affiliate of the issuer within the next three months: Deutsche
Telekom, Enel SpA, Iberdrola, Royal Dtch Shell.
MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this issuer. If this report was issued on or after the 9th day of the month, it reflects the
ownership position on the last day of the previous month. Reports issued before the 9th day of a month reflect the ownership position at the end of the second month preceding the date of
the report: Royal Dtch Shell.
MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the issuer on a principal basis: Deutsche Telekom.
The issuer is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Deutsche Telekom, Enel SpA, Iberdrola,
Royal Dtch Shell.
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Global Equity Volatility Insights | 06 June 2017 35
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36 Global Equity Volatility Insights | 06 June 2017
Research Analysts
Benjamin Bowler
Equity-Linked Analyst
MLPF&S
+1 415 676 3595
benjamin.bowler@baml.com
Abhinandan Deb >>
Equity-Linked Analyst
MLI (UK)
+44 20 7995 7148
abhinandan.deb@baml.com
Anshul Gupta >>
Equity-Linked Analyst
MLI (UK)
+44 20 7996 7062
agupta113@baml.com
William Chan, CFA >>
Equity-Linked Analyst
Merrill Lynch (Hong Kong)
+852 3508 3921
william.w.chan@baml.com
Nitin Saksena
Equity-Linked Analyst
MLPF&S
+1 646 855 5480
nitin.saksena@baml.com
Clovis Couasnon >>
Equity-Linked Analyst
MLI (UK)
+44 20 7995 0303
clovis.couasnon@baml.com
Jason Galazidis >>
Equity-Linked Analyst
MLI (UK)
+44 20 7996 5713
jason.galazidis@baml.com
Chintan Kotecha
Equity-Linked Analyst
MLPF&S
+1 646 855 5478
chintan.kotecha@baml.com
Stefano Pascale
Equity-Linked Analyst
MLPF&S
+1 646 855 2631
stefano.pascale@baml.com
>> 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.
Global Equity Volatility Insights | 06 June 2017 37