File 012044
Bank of America Equities Research: XLF Call Spread Trading Recommendation (File 012044)
Email correspondence from Bank of America Merrill Lynch equity research team discussing financial sector investment strategy and recommending XLF call spread trades following the 2016 U.S. presidential election.
Summary
Amanda Ens from Bank of America Merrill Lynch's Global Equities division distributed research on the financial sector outlook, recommending 'appearing' call spreads on the XLF (Financials Select Sector SPDR ETF) based on positive sentiment regarding potential deregulation, interest rate increases, and corporate tax cuts under the Trump administration. The analysis cites research from sector specialist Erika Najarian and global positioning data from Nigel Tupper, noting that large long-only funds were underweight financials and presented an upside opportunity. The recommendation includes specific trade structures with premium costs and payoff scenarios, supported by data on post-election flow trends and buyback momentum in the financial sector.
From: jeffrey E. [jeeyacation@gmail.com]Sent: 12/9/2016 3:56:27 PMTo: Ens, AmandaSubject: Re: Financials: buy XLF call spreadsAttachments: image001.pngImportance: Highlets try, 250k premiumRichard KahnOn Fri, Dec 9, 2016 at 11:46 AM, Ens, AmandaWe continue to see further upside in financials.wrote:• Erika Najarian, BAML financials research analyst, just returned from a marketing trip. Bottom line: NorthAmerican investors are very bullish the banks (long only AND hedge funds AND macro funds), but then conclude "Idon't own enough". Note that high touch flows have slowed down significantly since Thanksgiving and where thebuying has been concentrated in XLF (every client sector we have has been a better buyer of XLF).• Client focus:1) Regulation: Excitement, with the base case that it's not getting worse.2) Sentiment on rates: Cautiously bullish3) Sentiment on growth: Also bullish4) Sentiment on corporate tax rate cuts: buyside more bullish than sellside. In 1986, bank stocks exploded upward(outperforming the S&P) after Reagan's tax reform bill passed the Senate; and 2) in 2003, the last time we saw personaltax cuts, loan growth industry wide accelerated in 2003 and 2004.• Biggest Pushback on owning sector at current levels: Too far too fast: BKX +18.00% post election: Valuationcoming into question and 04 has typically been a seasonally weak qtr. Bulls defend valuation on '18ests with potentialupside to 2018 [PS from —25-40% and stocks still cheap vs. discretionary.• Price action and sentiment keeps us constructive, we like the long and would expect US financials to benefit fromany beta chase into year end.• How to play it? We still like "appearing" call spreads on XLFo Buy a 6 month 105% call with a short 110% call that knock in if XLF trades above 115% during the life of the tradefor 1.75% premium cost• Gross max payoff if knock-in is triggered: 2.8x (5.0%/1.75%)• Gross max payoff if knock-in is not triggered: 5.6x (9.9%/1.75%) — you have upside up to 114.9%Regards,AmandaAmanda EnsDirector Global EquitiesHOUSE OVERSIGHT 012044Bank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park 15th Floor New York, NY 10036Phone: MobileFrom: Ens, AmandaSent: Tuesday, November 22, 2016 2:15 PMTo: 'jeffrey E.'; Rich KahnSubject: Financials: buy XLF call spreadsUnderweight positioning, buybacks resuming, positive momentum and strong fundamentals all indicate that there isstill further upside potential in financials (more details below). Our financials sector specialist thinks XLF could haveanother 20-25% upside given the many levers to the Trump Trade: less regulation, higher interest rates, higher vol,economic growth, loan growth, etc. The asset sensitive regional banks are more of a pure play on a rates move but weview the larger cap banks as having multi-pronged upside given the aforementioned points.That said, given the velocity and magnitude of the recent move and uncertainty around the impact and timing ofTrump's policies, we believe options offer better risk-reward than being outright long financials stocks here. With flatcall skew, "appearing" call spreads with upside knock-ins price well.Buy a 1 year XLF call spread for 2.6% premium• Buy a 110% call• Sell a 117.5% call with an at-expiry knock-in at 125% (call is not active unless XLF is 125% or higher at expiry)o Total premium is 2.6%o Gross max payoff if knock-in is triggered: 2.9x (7.5%/2.6%)o Gross max payoff if knock-in is not triggered: 5.7x (14.9%/2.6%) — you have upside up to 124.9%Post Election Flow Skews - Buyers of Health Care (via ETFs) and Financials (mainly ETFs)• US Buyback Flows• Cons Disc, Technology and Financials are the largest 3 sectors for US buybacks (over 70% of execution). Weare seeing a seasonal increase in buybacks as we come out of the low seasonal month of the year (October) and shouldsee increased buyback executions until year-end, another source of upside for the Cons Disc, Technology and Financialssectors.Global Positioning, Nigel Tupper, 11/14. Large long-only funds are more underweight Financials than any othersector and are UW this sector in all regions.Future of Financials conference hosted 90 public and private companies at our Future of Financials conference. We areraising our price objectives across most of our names. Three primary reasons why we think there is upside remainingafter the recent rally: 1) an improved outlook on both activity levels and interest rates, driving revenue upside; 2)potentially lower regulatory burden, particularly as new supervisory leadership can come with the new administration;and 3) relatively lighter positioning in US financials vs. other sectors. (Erika Najarian)Trades Gaining Momentum: Finance-Related Assets vs. S&P 500HOUSE OVERSIGHT 012045In the period since the US presidential election, the three top-performing S&P sectors and industry groups have allbeen finance-related (Banks, Financials, Diversified Financials)Trades Gaining Momentum: Finance-Rdalhad Midi VS. SIP SOOJ-Cal .4).1ornbour .20Mmunelsis11/3/11111/S/III11,rvis11/11/111 11111M 1311S/111 11/17/1111/1/11TqchnatvesSWIMSource: Kensho TechnologiesThe Flow Show, Michael Hartnett, 11/18. Violent rotation: record equity ETF inflow, record financials inflow, biggestbond outflow in 3.5 yrs, record EM debt outflow.Regards,AmandaAmanda EnsDirector Global EquitiesBank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park 15th Floor New York, NY 10036Phone: Mobi1eThis message, and any attachments, is for the intended recipient(s) only, may contain information that isprivileged, confidential and/or proprietary and subject to important terms and conditions available athttp://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete thismessage.please noteHOUSE OVERSIGHT 012046The information contained in this communication isconfidential, may be attorney-client privileged, mayconstitute inside information, and is intended only forthe use of the addressee. It is the property ofJEEUnauthorized use, disclosure or copying of thiscommunication or any part thereof is strictly prohibitedand may be unlawful. If you have received thiscommunication in error, please notify us immediately byreturn e-mail or by e-mail to jeevacation@gmail.com, anddestroy this communication and all copies thereof,including all attachments. copyright -all rights reservedHOUSE OVERSIGHT 012047