File 014310
Email: SPX Put Contingent on Higher Rates - Amanda Ens Market Analysis (File 014310)
Email from Bank of America Merrill Lynch Director Amanda Ens to Jeffrey Epstein and Richard Kahn discussing post-election market volatility, equity hedging strategies, and S&P 500 put options conditional on US Treasury rate movements following the 2016 election.
Summary
Amanda Ens, Director at Bank of America Merrill Lynch, sends a high-importance email analyzing unprecedented market divergences post-Trump election victory, with falling equity volatility contrasting against rising rates volatility and significant bond market selloffs. The email proposes a financial hedging strategy of buying SPX April 2017 95% put options contingent on US 10-year constant maturity swap rates exceeding 2.5%, priced at 0.87% (70% discount versus vanilla puts). The analysis includes detailed charts comparing equity volatility responses across major political events and historical Treasury yield movements.
From: Ens, AmandaSent: 11/15/2016 2:44:06 PMTo: jeffrey E. [jeeyacation@gmail.com]; Richard KahnSubject: SPX put contingent on higher ratesAttachments: image001.jpg; image002.jpg; image003.jpg; image005.pngImportance: HighNavigating post-Trump volatility• We are recording unprecedented divergences in falling equity vol with rising rates vol post Trump's win. Intra-day S&P realized vol collapsed from near 60% to below 20% in 2d [Chart 1]• While equities have shown less conviction over what a Trump win means (given strong sector rotation), thebond market has sold off with one of the largest moves in history [Chart 2 & 3]• Stabilizing rates volatility from here is key to markets remaining calm and while equity upside may continue, it isnot without higher risks• We like cheap optionality to hedge long-equities if rates continue to move sharplyFor investors long equities, we look at ways to cheapen protecting from downside risks in the event of further bondmarket volatility catalysed by Trump policy uncertainty• Buy an SPX Apr-17 95% put conditional on US 10Y CMS > 2.5% at maturity for 0.87%O 70% discount vs. vanillaO CMS ref. 2.11%, SPX ref. 2,164.2CMS = constant maturity swapChart 1: The response in S&P 500 realized equity volatility to the US election surprise was similar to Brexit but more extreme, as thespike in volatility collapsed at record speed140%=•• 120%a, 100%.180% -a60%▪ 40%5 20%0%20%0%•••• • • ••• • 18; . . ••%.• • .%• e• j is••••„• ••US Etecbon (10. & 11-Nov vol S 9-Now fol)Brexit (28- & 27-Jun lot vs 24-Jun %pi)40% 60% 80% 100% 120%SPX 1-day intrcityvolSource: BofA Merrill Lynch Global Research. Based on daily data from June 2004 to current140%160%Chart 2: Ten-year US Treasury yields see a near record spike after Chart 3: Long Bond futures prices down near record amountthe US election (-5%) in the four days since the electionHOUSE OVERSIGHT 01431024%19%14%9%4%I "8 —------cn (y)co0te).6,coLa.es.16Fs.;6.8cogg(r&cr) o70 15%6050 10%40II 30 5%20 10 0%-5%L.r2 :7- 0-8 (.3 8 - •10% 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016• Largest 4-clav %changes in 10yr UST yeelcIs since 1962Change rneasixed n bps (ngtt)Source BofA Merrill Lynch Global Research. Based on daily data since 1962.Amanda EnsDirectorBank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park, 5th Floor, New York, NY 10036The power of global connections'Bankof AmericaMerrill Lynch— 4-day rehrn of a 30fr UST futures mestrnent14-Na -16Source BofA Merrill Lynch Global ResearchThis 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.HOUSE OVERSIGHT 014311