Global Equity Volatility Insights
Want a cheap call on EU equity? Monetise
correlation through EU bank dispersion
we estimate 68% of the
20 June 2017
Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com
US
Extract alpha from summer SPX range as policy and positioning “collar” equities
With the Federal Reserve last week appearing more emboldened to normalize monetary
policy, risk asset bears have come out in force. While we agree that a changing Fed
reaction function is likely not supportive of substantial equity upside, we think the
“Yellen put” still exists, albeit with a lower strike. Hence, we see monetary policy as
providing a near-term “collar” (long put/short call) on a US equity market already prone
to getting trapped in record-tight trading ranges. Further impetus for a summer rangetrade
should come from (i) fiscal policy, as gridlock caps equity upside but policy hope
floors the downside, and (ii) positioning, where the risk of continued “fragility events”
(potentially exacerbated by stretched quant fund/short vol positioning) meets cashed-up
investors still accustomed to buying dips. As a risk-limited range trade, we like buying
in-the-money down and out puts on the S&P. For example, an SPX Sep 2475 put that
knocks out at 2300 (6% OTM) indicatively costs 70bps (spot ref 2451), a 60% discount
to the 2475 / 2300 put spread.
Europe
Long EU banks dispersion: Buy Dec17 call on a basket, sell worst-of call
We recommend positioning for greater dispersion in EU bank sector returns via buying a
Dec17 105% call on an equally-weighted basket of Santander, BNP, ING, Intesa and
Deutsche Bank, part-financed by selling a worst-of call on the same basket for 1.8%
(net) indic., as: 1) improving macro/earnings, sensitivity to rates and regulatory
headwinds are likely to lead to greater differentiation within banks, 2) the entry point is
attractive given historically low implied vol (13 th 8y+ percentile) and high implied
correlation (81% bid vs latest 6M realised correl of 66%), 3) historical risk-reward at
current pricing is attractive (avg. P&L of +8.4% when positive vs -1.8% when negative),
and 4) the trade can be considered as a cheap call on EU equities as it has a similar
payoff profile but with greater benefit relative to its cost.
Asia
Buy depressed China vs. US risks through corridor variance spreads
As global central banks have taken on more hawkish tones, the uncertainty surrounding
policy tightening will be more positive for EM volatility than for DM volatility.
Additionally, our strategists have a more bearish outlook for the Chinese banking sector
(which makes up a majority of the HSCEI index) amid rapidly rising leverage, complex
shadow banking, and excessive home price inflation. Since we believe the global
synchronized monetary tightening will impact HSCEI volatility more than SPX volatility,
we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points, a 3 vol
point discount to a vanilla variance spread. The entry point is attractive as the HSCEI-
SPX 18-month variance swap spread has fallen back to the lower-end of its 5-year
trading range, the trade has a positive carry, and it benefits during China risk-off events.
>> 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 28 to 29. Analyst Certification on page 27. 11756528
Timestamp: 20 June 2017 01:18AM EDT
Equity Derivatives
Global
Global Equity Derivatives Rsch
MLPF&S
Anshul Gupta >>
Equity-Linked Analyst
MLI (UK)
Nitin Saksena
Equity-Linked Analyst
MLPF&S
William Chan, CFA >>
Equity-Linked Analyst
Merrill Lynch (Hong Kong)
Abhinandan Deb >>
Equity-Linked Analyst
MLI (UK)
Benjamin Bowler
Equity-Linked Analyst
MLPF&S
benjamin.bowler@baml.com
Jason Galazidis >>
Equity-Linked Analyst
MLI (UK)
Clovis Couasnon >>
Equity-Linked Analyst
MLI (UK)
Chintan Kotecha
Equity-Linked Analyst
MLPF&S
Michael Youngworth
Equity-Linked Analyst
MLPF&S
Nikolay Angeloff
Equity-Linked Analyst
MLPF&S
See Team Page for List of Analysts
Table 1: 3M volatility (weekly changes)
Implied Realized
S&P500 9.8 (-0.2) 7.1 (-0.2)
ESTX50 13.4 (0.3) 11.5 (0.2)
FTSE 10.0 (-0.4) 9.7 (0.2)
DAX 12.6 (0.3) 10.7 (0.5)
NKY 13.8 (-0.2) 12.3 (-0.2)
HSI 12.4 (0.1) 10.1 (0.2)
KOSPI 12.2 (0.3) 10.5 (0.1)
EEM US 15.6 (0.5) 11.8 (-1.1)
TOP40 16.9 (1.2) 11.1 (0.3)
RDX 25.9 (0.9) 20.6 (-1.1)
IBOV 22.9 (-1.7) 25.5 (-0.7)
ISE30 20.2 (0.4) 13.5 (0.1)
Source: BofA Merrill Lynch Global Research
BofAML GFSI TM X-Asset Risk Landscape
Stress now below normal for all asset classes
The indicator was little changed last week, finishing at -0.23.
• Stress is now in benign territory across all five asset classes: Stress in
across all asset classes (except equity) declined last week. Notably, rates stress
turned negative (benign territory) and stresses across all five asset classes are
now negative.
• Stress in Equity skew rose as ESTX50 and (to a lesser extent) S&P500 skew
steepened; indeed the gain in ESTX50 skew was the greatest across GFSI subcomponents
(Chart 2) and also historically significant (Chart 5).
• Commodity-related stresses fell the most across asset classes (Chart 3), led
by declines in Crude and Gold vol (Chart 2), reversing some of the gains after
geopolitical tensions in the Middle East rose in recent weeks.
Chart 1: Latest* stress across GFSI sub-components
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
GFSI Stress
1.48
1.39
Govt-OIS EUR
Basis Swap USDJPY
1.00
0.81
Basis Swap EURUSD
Euro member Bond…
0.54
Nikkei Skew
Red shaded area highlights components in
Bearish territory
ESTX50 Skew
Bond Basis EUR
Govt-OIS USD
HY Bond Flow
Source: BofA Merrill Lynch Global Research. *Latest as of 16-Jun-17.
Risk
Skew
Flow
Green shaded area highlights components in
Bullish territory
-1.17
-1.18
-1.24
-1.38
-1.45
CDS Index Skew USD
CDS Index Skew EUR
USDJPY Skew
Bond Basis USD
Libor-OIS USD
Equity Fund Flow EM
SP500 Skew
IG Foreign Sovrn Bond…
Libor-OIS GBP
GBPUSD Imp Vol
Libor-OIS JPY
EURJPY Skew
Sub IG Foreign Sovrn…
Libor-OIS EUR
HY Corp CDS USD
IG Corp CDS USD
IG Corp CDS EUR
Comdty Imp Vol Crude
Volume Flow
HY Corp CDS EUR
AUDJPY Skew
HSI Imp Vol
USDJPY Imp Vol
FTSE Imp Vol
Money Mkt Flow
ESTX50 Imp Vol
Comdty Imp Vol Copper
SP500 Imp Vol
3Y/5Y Credit Curve EUR
Int Rate Imp Vol USD
Comdty Imp Vol Gold
Nikkei Imp Vol
EURUSD Imp Vol
Int Rate Imp Vol EUR
Chart 2: Change** in stress across GFSI sub-components
0.8
Change in GFSI Stress
0.4
0.0
-0.4
-0.8
0.65
ESTX50 Skew
0.21
CDS Index Skew EUR
0.12
0.10
SP500 Skew
GBPUSD Imp Vol
0.07
Libor-OIS USD
Source: BofA Merrill Lynch Global Research. **Latest as of 16-Jun-17. Change vs 1 week prior (9-Jun-17).
The GFSI Risk Allocator (using Bull, Bear & Neutral weights of 2, 0, 1) suggested a 17.4%
overweight position on 16-Jun (vs 13.0% OW as of 9-Jun). The percentages of Bullish,
Bearish and Neutral GFSI components (as used in the Risk Allocator) as of 16-Jun were
34.8%, 17.4% and 47.8% respectively.
-0.20
-0.23
-0.23
-0.37
-0.38
Govt-OIS USD
Govt-OIS EUR
ESTX50 Imp Vol
Equity Fund Flow EM
HY Corp CDS USD
Bond Basis USD
Sub IG Foreign Sovrn…
IG Corp CDS USD
HSI Imp Vol
Nikkei Skew
USDJPY Imp Vol
Libor-OIS JPY
Libor-OIS EUR
Money Mkt Flow
HY Corp CDS EUR
IG Foreign Sovrn Bond…
HY Bond Flow
Libor-OIS GBP
SP500 Imp Vol
Nikkei Imp Vol
IG Corp CDS EUR
3Y/5Y Credit Curve EUR
EURJPY Skew
FTSE Imp Vol
Int Rate Imp Vol USD
Comdty Imp Vol Copper
Int Rate Imp Vol EUR
Euro member Bond…
EURUSD Imp Vol
CDS Index Skew USD
Basis Swap EURUSD
Basis Swap USDJPY
Comdty Imp Vol Gold
AUDJPY Skew
Comdty Imp Vol Crude
USDJPY Skew
Bond Basis EUR
Volume Flow
Risk
Skew
Flow
2 Global Equity Volatility Insights | 20 June 2017
Chart 3: Stress in commodities fell the most last week (driven by a drop
in crude oil vol) while stress in equities rose marginally (led by equity
skew)
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
0.04
-0.03 -0.03 -0.08
-0.16
Equities Credit Rates FX Commodities
Chart 4: EM and the US are the least stressed GFSI regions globally
0.05
0.00
-0.05
-0.10
-0.15
-0.20
-0.25
-0.30
-0.35
-0.40
0.02
0.02
-0.01 -0.03
EM Europe Japan US
Latest stress (16-Jun-17)
Change in stress
Latest stress (16-Jun-17)
Change in stress
Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17).
Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-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%
92%
ESTX50 Skew
83% 82% 82% 81% 80% 79% 79% 77%
Libor-OIS USD
USDJPY Skew
Bond Basis EUR
Basis Swap
EURUSD
Comdty Imp Vol
Gold
Basis Swap
USDJPY
67%
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 (9-Jun-
17 to 16-Jun-17).
AUDJPY Skew
Stress fall
Stress rise
Euro member
Bond Spread
Comdty Imp Vol
Crude
Chart 6: Global volatility & credit spread stress in the GFSI
0.2
0.0
-0.2
-0.4
-0.6
-0.8
-1.0
-1.2
-1.4
0.01 0.01
HY CDS
Latest stress (16-Jun-17)
FX Vol
IG CDS
0.00 -0.01 -0.02 -0.06
Equity Vol
Change in stress
Sovrn risk
Source: BofA Merrill Lynch Global Research. 1wk change (9-Jun-17 to 16-Jun-17).
Rates Vol
-0.16
Commodity Vol
Global Equity Volatility Insights | 20 June 2017 3
Volatility in the US
Risk-limited alpha in a “collared” market: SPX ITM KO puts
US equities vulnerable…to a summer range-trade
The Federal Reserve last week appeared more emboldened to normalize monetary
policy, not only raising interest rates by 25bps but also reiterating its intention to hike
four more times by the end of 2018 and stating that it “expects to begin implementing
a balance sheet normalization program this year” - all despite recent softness in
inflation data. Breakeven rates of inflation narrowed following the Fed communications
due to tighter monetary conditions in the face of slowing US economic data, and risk
asset bears responded in force, suggesting that Janet Yellen had “broken up” with
investors and that it would be prudent to sell “before it’s too late”.
We agree that the changing reaction function of the Fed is likely not supportive of
further substantial US equity upside and may be viewed as the Fed now providing a
short call option on the S&P 500. However, in our view, it is premature to conclude
from last week’s developments that the “Yellen put” is dead. We see its strike as
declining but would not underestimate Yellen’s dovish inclinations in a shock or the
capacity for the Fed to still remain credibly on hold as long as the US economy is not
“running hot”.
In short, we see monetary policy as now providing a “collar” (long put / short call) on a
US equity market that has already shown a propensity over the past year for getting
trapped in record tight trading ranges. 1 Other factors may also conspire to create a
summer range-trade for US equities, namely (i) fiscal policy, where gridlock likely caps
equity upside but lingering policy hope floors the downside, and (ii) positioning, where
the risk of continued “fragility events” (potentially exacerbated by stretched quant
fund/short vol positioning) meets cashed-up investors still accustomed to buying dips.
Tug of war between fragile market/stretched positioning and cashed-up dip-buyers
As we have noted recently, US equities have displayed a historically unusual tendency to
jump rapidly from calm to stress and back (“fragility”), with the recent Tech sell-off and
rebound the latest example. For example, in the past year, the S&P 500 has seen
5sigma declines (3 in total—Brexit, Sep-16, May-17) occur 20x more frequently than
over the prior 90 years or so. The increased frequency of these “fragility events” is in
part due to vol failing to remain high post a spike as equity market participants continue
to aggressively “buy the dip” and in the process reset vol lower.
Historically low vol alongside consistently upward trending equity markets and low cross
asset correlations could be creating stretched positioning across markets. For example,
upward trending equities on historically low vol may be pushing CTA equity positioning
to near record levels (Chart 7). Risk parity portfolios could be increasing their leverage
due to low vol as well as low cross asset correlation (Chart 8). And lastly, inverse VIX
ETPs have seen increased open interest as performance has swelled on the back of
continued declines in vol and attractive term structure risk premia (Chart 9).
Should vol spike again alongside a reversal in equity price momentum and a rise in cross
asset correlations, then unwinds from these strategies could exacerbate market fragility.
However, this must be weighed against an investor base that has plenty of cash on hand
(Chart 10) and their potentially fickle but still-intact tendency to view any equity market
dip as an alpha opportunity.
1
For example, the Dow Jones Industrial Average traded in its tightest trading range in over
110 years in Jan-17; this followed a record in the S&P 500 ending Sep-16 for the longest
stretch of trading within a range of 1.77% since 1928.
4 Global Equity Volatility Insights | 20 June 2017
Chart 7: A combination of upward trending global equity markets and
very low volatility have conspired to push trend following (CTA) equity
positioning to near record levels. Consequently, the beta of CTA
strategies to global equities is also at extreme levels
Chart 8: Owing to low cross asset vol and strong diversification, the
volatility of risk-balanced multi-asset portfolios has fallen to historically
low levels. Consequently, leverage levels across multi-asset & other
portfolios that target fixed vol have likely hit their caps
1.00
0.75
0.50
0.25
0.00
-0.25
-0.50
-0.75
-1.00
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
MSCI World (Ratio of trend strength to volatility) (LHS)
BofAML Model CTA Global Equity Allocation (RHS)
May-17
20
15
10
5
0
-5
-10
-15
-20
24%
20%
16%
12%
8%
4%
0%
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
2014
2017
Model Risk Parity Leverage (Vol Target: 10% & Max Leverage: 3x) (RHS)
Unlevered BofAML Model Risk Parity Volatility (LHS)
3.0x
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
Source: BofA Merrill Lynch Global Research. Based on daily data form 2-Jan-2015 to 16-Jun-2017.
CTA = Commodity Trading Advisor
It is important to note that not all CTA, risk parity, or vol control strategies operate
similarly and there is model risk in estimating the exact size of these trading flows.
Source: BofA Merrill Lynch Global Research. Based on daily data from 3-Jan-72 through 16-Jun-17.
Equity, fixed income, and commodity components within the hypothetical risk parity investment are
represented by the S&P500, 10-Year US Treasury Bonds, and the S&P GSCI Index, respectively. Risk
parity allocations are determined and rebalanced monthly using prior 12-month realized volatility
and correlations.
Chart 9: The vega outstanding in inverse VIX ETNs has also reached a
record high at ~$125mn vega
Chart 10: Global FMS average cash balances (%) remain elevated,
suggesting dry powder for investors still conditioned to buy equity dips
VIX ETP open interest ($mn vega)
350
Unlevered long
Levered long
300
Inverse
Net vega across VIX ETPs
250
200
150
100
50
0
-50
-100
-150
2012 2013 2014 2015 2016 2017
Source: BofA Merrill Lynch Global Research. Daily data from 13-Feb-12 through 16-Jun17.
Extract risk-limited alpha from SPX range via cheap in-the-money knockout puts
As a risk-limited range trade, we like owning down-and-out puts on SPX that are already
in-the-money. For example, the SPX Sep 2475 put with a 2300 knock-out (continuous
observation) indicatively costs 70bps (spot ref 2451) and offers a 60% discount to the
vanilla 2475/2300 put spread, which is itself historically cheap (Chart 12).
If SPX stays above the 2300 barrier at all points in time before expiry, the structure is
equivalent to a 2475 put option. If the barrier is instead breached, the maximum loss
will be equal to the (low) upfront premium. The 2300 barrier is about 6% out-of-themoney,
hence “allows” for the elusive 5% correction not seen since Brexit (on a closing
basis). However, investors can mitigate the risk of breaching the barrier by either
moving it farther down (e.g., a 2245 barrier would indicatively raise the cost from 0.7%
to 1%), or by only observing it on a close-to-close basis (in turn sacrificing part of the
discount).
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
Backtest Actual
3.0%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17
2400
2200
2000
1800
1600
1400
1200
1000
FMS avg cash balance (%)
S&P 500 (RHS)
Source: BofA Merrill Lynch Global Fund Manager Survey, Bloomberg. As a reminder, the FMS Cash
Rule works as follows: when average cash balance rises above 4.5% a contrarian buy signal is
generated for equities. When the cash balance falls below 3.5% a contrarian sell signal is generated.
800
600
Global Equity Volatility Insights | 20 June 2017 5
The trade prices attractively today due to exceptionally steep SPX put skew, which is
near its highs established since 2004 (Chart 11). With steep SPX put skew, the market
is implicitly pricing in a high probability that the option will knock-out during its life, i.e.,
that relatively large drawdowns are more likely. As detailed above, however, we see
many reasons why the most likely near-term scenario for US equities is to remain
range-bound. The structure is short 11% delta at inception and has the same vega
sensitivity as the equivalent put spread (short 6bps).
Chart 11: SPX put skew is near the all-time highs reached since 2002.
Steep skew helps cheapen knockout puts as the market is implying a
relatively high probability of the barrier being breached
Chart 12: The price of SPX put spreads is already near the lows reached
since 2002. In particular, the price of a 3m 50d-25d put spread is
~1.02%, in the 0.1 st %-ile since Nov-02
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
3.5%
3.0%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Nov-02
Nov-03
Nov-04
Nov-05
Nov-06
Nov-07
Nov-08
Nov-09
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Nov-16
SPX 3m 90-100 put skew
16-Jun-17
SPX 3m 50d - 25d put spread
16-Jun-17
Source: BofA Merrill Lynch Global Research. Data from Jan-04 to 16-Jun-17. The 90 and 100 strikes
are based on the SPX forward.
Source: BofA Merrill Lynch Global Research. Data from Nov-02 to 16-Jun-17.
6 Global Equity Volatility Insights | 20 June 2017
Notable trends and dislocations (US)
The Fed turns more hawkish, though vol remains subdued
Last week, unsurprisingly the Fed opted to hike benchmark rates another 25bps.
However, the market was more focused on the FOMC’s unexpectedly hawkish message,
which indicated that it is willing to normalize policy despite weaker-than-desired
inflation. Our economists now think the Fed will announce balance sheet normalization
in September and will hike rates again in December. A more hawkish Fed could result in
higher real rates and a stronger USD, which ultimately should benefit our Growth to
Value rotation trade of long XLF calls versus short QQQ calls (see Chart 15). The S&P
500 was more-or-less flat week-over-week as it gained only 6bps. The tech selloff
continued, however, and the Nasdaq-100 dropped 105bps. Similarly, the Russell 2000
also dropped 105bps. Despite concerns on the Fed, the VIX fell 0.32 vol points to 10.38,
and SPX 1m ATM implied vol declined 0.3 vol points to 7.6%.
Chart 13: The Nasdaq has set a new record for consecutive days without
a 5% peak-to-trough drawdown
160
140
120
100
80
60
40
20
150
136
135
111
104
98
97
95
94
92
86
74
71
67
65
61
56
55
54
53
51
50
50
48
46
46
43
40
38
30
28
21
17
15
11
11
11
11
8
7
5
On June 9, the Nasdaq dropped nearly 2% as investors unwound
crowded positions, resulting in a sudden selloff from a period of
relative calm. However, despite the volatility among tech names
during the first week of June, the Nasdaq (CCMP) has not seen a
5% drawdown from a prior peak (using closing data) in 150
days. This is the longest such streak in the Nasdaq’s history.
Prior to today, the longest periods of similar calm occurred
during July ’83 and July ’86, when the index did not record a 5%
drawdown from a peak in 136 and 135 days respectively.
0
16-Jun-17
14-Jul-86
27-Feb-97
21-Jun-71
22-Nov-93
20-Aug-15
19-Nov-91
3-Nov-16
29-Sep-80
29-Mar-94
5-Feb-99
4-Oct-95
8-Dec-80
14-Apr-87
3-Mar-80
14-Mar-00
22-Jul-99
21-Sep-78
19-Apr-99
28-Jan-00
15-Oct-99
Source: BofA Merrill Lynch Global Research. Data from 1-Feb-71 to 16-Jun-17. Drawdowns measured
from prior peaks and using close-to-close data.
Chart 14: On 16-Jun, the SPX had its 11 th consecutive session of moves
not exceeding 0.5% in either direction on a close-to-close basis. This is
the 4 th time this year that such a streak has surpassed 10 days
50
40
30
20
10
0
'64 '65 '52 '17 '59 '62 '63 '67 '95 '51 '53 '66 '68 '72 '93 '16
Max # of days without an up or down move > 0.5% (LHS)
# times SPX has gone for 10 days w/o a 0.5% move (RHS)
Source: BofA Merrill Lynch Global Research, Bloomberg. Data from Jan-1928 to 16-Jun-2017.
10
8
6
4
2
0
Last week the S&P 500 recorded its 11 th session without a
move larger than 0.5% in either direction. As a result, 10d
realized vol stood at 3.31% as of 16-Jun.
This is already the fourth time this year that SPX has gone more
than 10 consecutive days without a move greater than +/- 0.5%.
This has historically happened only in ’64, ’65 and ’52. The
longest such stretch this year lasted 15 consecutive trading
sessions and ended on 16-May. For comparison, in ’64 SPX had
8 stretches without such a move with the longest stretch
spanning 43 days.
Global Equity Volatility Insights | 20 June 2017 7
Chart 15: Buying an XLF 1m ATM call financed by selling a QQQ 1m call is
still an attractive way for investors to rotate out of Growth and into
Value
1.3
1.1
0.9
0.7
0.5
2012 2013 2014 2015 2016 2017
# of 1m XLF calls one 1m QQQ call buys
Current (99th %-ile)
Average
Last week, we highlighted that investors who want to rotate out
of Growth strategies into Value strategies should take
advantage of elevated tech vol by buying XLF 1m ATM calls
financed by selling QQQ 1m ATM calls. After last week’s FOMC
meeting, the case for such a trade grows even stronger as the
market thinks the Fed has become more hawkish, driving up
real rates and the USD. Amid this backdrop, one could see
outperformance of Value names over Growth names, which tend
to have higher amounts of offshore revenues that would come
under pressure by a stronger dollar.
Additionally, the trade remains attractive at current levels as
pricing has only been better 1% of the time in 5 years. Today,
1.03 XLF calls could be bought for each QQQ call sold, whereas
over the past 5 years, the average number of XLF calls that
could be purchased was only 0.80.
Source: BofA Merrill Lynch Global Research. Data from 9-Jun-12 to 16-Jun-17.
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
16 Jun 17 9 Jun 17 Change
Current
ranking
Minimum 25% Median 75% Maximum
1-month ATM implied volatility 7.6% 7.9% -0.3% 1.3% 7.1% 9.8% 11.7% 14.5% 31.8%
1-year ATM implied volatility 14.0% 14.0% 0.0% 7.7% 13.4% 15.3% 16.2% 17.3% 22.5%
1-week intraday realized volatility 7.8% 7.3% 0.5% 19.6% 5.2% 8.3% 10.6% 14.0% 53.7%
1-year minus 1-month term structure 6.5% 6.1% 0.4% 99.2% -12.0% 2.7% 4.4% 5.4% 7.0%
3-month 90 minus 110 skew 8.5% 8.3% 0.2% 16.1% 7.1% 9.4% 11.3% 11.8% 13.8%
1-year top 50 implied correlation 45.44 45.10 0.35 8.1% 42.03 49.37 54.22 57.14 65.55
3-month top 50 realized correlation 21.30 24.08 -2.78 16.8% 12.57 27.15 37.28 48.45 60.41
VIX 1-month ATMf implied vol 81.9% 80.0% 1.9% 39.9% 61.2% 78.2% 85.0% 95.2% 162.2%
VIX 1-month 110 minus 90 skew 27.1% 26.9% 0.2% 88.6% 9.3% 18.6% 21.5% 23.8% 30.3%
Source: BofA Merrill Lynch Global Research
8 Global Equity Volatility Insights | 20 June 2017
Volatility in Europe
Buy EU banks dispersion: (+) basket call, (-) worst-of calls
Trade: Long Dec17 105% call on an equally weighted basket of SAN, BNP, ING,
ISP & DBK*, short Dec17 ATM worst-of call on the same basket for 1.8% indic.
(correl bid: 81%).
* We pick the top 5 stocks with the largest market cap within the SX7E (EU banks sector
index) corresponding to 5 different countries
We have previously highlighted our preference for vol dispersion trades both in the US
and the EU – with the most recent recommendation being sector dispersion
opportunities within the EU. In a similar vein, we suggest positioning for greater
dispersion within EU banks via buying a call on a basket of Santander, BNP Paribas, ING,
Intesa and Deutsche Bank part-financed by selling a worst-of call on the same basket as:
• Improving macro/earnings, sensitivity to rates and regulatory headwinds likely
to lead to greater differentiation within banks: An improving macro backdrop in
Europe & ongoing improvement in EPS revisions (see Style Cycle) paint a bullish
picture for EU banks as they are seen as leveraged macro plays within the EU.
However, we believe there is a potential for greater differentiation within banks as
our bank analysts have argued before (here and here) that: (i) some banks stand to
benefit more than others based on their earnings power should the uptick in the
earnings cycle continue, (ii) banks’ gearing to interest rate cycles, and therefore
likely impact from a more hawkish ECB, varies between different banks and (iii)
French and Benelux banks are likely to be most impacted under potential Basel IV
regulations.
• Entry point is attractive given historically low implied vols: The structure
benefits from its long vol bias as average 6M implied vol on the basket of 5
European banks is historically low (13 th %-ile since Jan-08, Chart 16).
• High implied correlation beneficial for structure’s short correlation bias: Chart
17 shows the average pairwise 6M and 3M realised correlations between the 5 EU
banks, which are historically low. Despite this recent drop in realised correlations,
implied correlation is priced higher, thus providing an interesting entry point for the
(short-correlation) trade.
Global Equity Volatility Insights | 20 June 2017 9
Chart 16: SAN, BNP, ING, ISP and DBK average 6M ATMf implied vol is
trading historically low (13 th percentile since 2008)
100%
80%
60%
40%
20%
Mar-08
Mar-09
Mar-10
Mar-11
Basket of SAN, BNP, ING, ISP & DBK
Mar-12
Mar-13
Mar-14
Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17
13th percentile
Mar-15
Mar-16
Mar-17
6M avg realised vol 6M avg implied vol Last IV (16-Jun-17)
Chart 17: Despite the recent drop in realized correlation, implied
correlation is priced near the high end of the reaiised range for the
basket of EU banks
90%
80%
70%
60%
50%
40%
30%
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
3M realised correl 6M realised correl Dec17 implied correl
Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17
• Attractive risk-reward profile at current pricing: As highlighted in Exhibit 1,
historically the trade held to expiry, at current pricing, would have generated an
average P&L of 8.4% when positive and -1.8% when negative. The risk-reward
looks even more attractive in extreme market outcomes as the max P&L of the
trade which is greater than 75% compares to the max loss of only 5.7%. The trade
also provides an effective way to gain long exposure to EU equities with limited
risks, as evident from the call-like payoff in Exhibit 1 (vs the ESTX50). It is worth
noting that, by construction, the maximum loss of the trade is 6.8% with the most
likely loss limited to the upfront premium of 1.8%. We also note that the trade
payoff profile is superior to a SX5E Dec17 ATM call when sized such that: (i) the call
premium is the same as the upfront premium for the dispersion trade (=1.8%, blue
line), as well as (ii) when the call premium is the same as the theoretical maximum
loss for the trade (=6.8%, orange line).
Exhibit 1: Hypothetical back-test of long Dec17 105% call on a basket of SAN, BNP, ING, ISP & DBK, short Dec17 ATM worst-of call on the same basket
(upfront premium = 1.8%)
80%
ESTX50 6M returns
Trade P&L (long basket call, short worst-of)
80%
P&L
60%
Avg P&L when positive: 8.4%
Avg P&L when negative: -1.8%
70%
60%
40%
50%
40%
20%
30%
0%
-20%
20%
10%
0%
SX5E 0.46x Dec17 ~ATM call
-40%
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
-10%
SX5E 1.7x Dec17 ~ATM call
SX5E returns
-20%
-60% -40% -20% 0% 20% 40% 60%
Source: BofA Merrill Lynch Global Research. Data: 3-Jan-00 to 16-Jun-17. Back-testing is hypothetical in nature & reflects application of the strategy prior to its introduction. It is not actual performance & is not intended to
be indicative of future performance. The two call payoff diagrams shown in the chart correspond to SX5E Dec17 3575 strike call sized such that upfront premium = 1.8% (0.46x notional, blue line, equal to the upfront
premium for the trade) and 6.8% (1.7x notional, orange line, equal to potential max loss of the trade)
10 Global Equity Volatility Insights | 20 June 2017
Notable trends and dislocations (Europe)
European equities ended the week lower mainly due to a tech-driven sell-off on 12-Jun
during which the SX8P (European tech sector) witnessed its largest 1-day decline since
the UK’s EU referendum. Nevertheless, implied vols across European indices remained
mostly unchanged near 2 year lows.
• European intra-sector correlation continues to decline while inter-sector
correl has hit a floor: The average EU intra-sector 3m correlation is near a 10-
year low currently. In contrast, the average 3m inter-sector correlation reached a
10-year low in Mar-17 driven by post US election reflation trades but is now
rising off its lows likely driven by an unwind of reflation trades.
• SX7E implied-realised correlation near 5-year highs: SX7E 6m implied
correlation fell since Mar-17 but the implied-realised correlation spread remains
in the 88 th 5-year percentile driven by even lower realised correlation.
• ESTX50 3M put skew is near 5 year highs, in stark contrast to SXEP
(European Oil & Gas equity) put skew which is close to 5 year lows.
• The overall seasonality in ESTX50 realised volatility since 1987 has been one of
relatively lower vol during the summer months vs. autumn. In particular, May
stands out as the lowest vol month across most 10 year horizons, and this
also appears to be the case so far this year.
EU Intra-sector correl continues to decline while inter-sector correl is supported
The average European intra-sector 3m correlation is near a 10-year low, partly driven by
divergence within the personal & household goods, utilities, real-estate, autos and
insurance sectors (Chart 18 and Table 3). Interestingly, the average 3m inter-sector
correlation reached a 10-year low on 14-Mar-17 (as the 8-Nov-16 US election led to the
outperformance of sectors sensitive to inflation) but inter-sector correlation now seems
supported likely driven by the unwind of reflation trades (Chart 18).
Global Equity Volatility Insights | 20 June 2017 11
Chart 18: European intra-sector realised correlation is near a 10-year
low, which suggests that we are currently in a stock pickers
environment
100%
80%
60%
40%
20%
0%
Jun-07
Feb-08
Oct-08
Average SXXP 3m inter-sector correlation*
Average SXXP 3m intra-sector correlation**
4th 10-yr
percentile
Jun-09
Feb-10
Oct-10
Jun-11
Feb-12
Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily returns and
assuming current weights. Data from 16-Mar-07 to 16-Jun-17. *Average correlation between each of
the 19 SXXP sector indices and the other SXXP sector indices. **Average of the 19 intra-sector
correlations (in Euro) where the 19 sector indices are the indices which make up the SXXP index.
Note that the average intra-sector correlation calculated using returns in local currencies is also near
a 10-year low (2 nd 10-yr percentile).
Oct-12
Jun-13
Feb-14
3rd 10-yr percentile
Oct-14
Jun-15
Feb-16
Oct-16
Jun-17
Table 3: Personal & household goods, utilities, real-estate, autos and
insurance are the top 5 sectors with the lowest 10-yr percentile of intrasector
3m realised correlation
Intra-sector 3M correl
Sector ticker Sector name Level 10yr %-ile
SXQP Pers. & Hous. Goods 17% 0%
SX6P Utilities 24% 1%
SX86P Real estate 40% 1%
SXAP Autos 41% 1%
SXIP Insurance 32% 1%
SXRP Retail 19% 4%
SXTP Travel 26% 5%
SXFP Financials 28% 5%
SX4P Chemicals 28% 6%
SXNP Industrials 30% 7%
SXPP Basic res. 50% 11%
SXDP Health care 24% 11%
SXMP Media 27% 12%
SXOP Construction 39% 13%
SXKP Telcos 32% 14%
SXEP Oil & Gas 42% 21%
SX7P Banks 47% 23%
SX3P Food & bev 31% 25%
SX8P Tech 35% 35%
Source: BofA Merrill Lynch Global Research. 3m correlations calculated using daily Euro returns and
current weights. Data from 16-Mar-07 to 16-Jun-17.
SX7E implied-realised correlation near 5 year high, driven by stock-level divergence
SX7E 6m implied correlation has fallen since Mar-17 but the implied-realised correlation
spread remains in the 88 th 5 year percentile (Chart 19). Notably, the low SX7E 6m
realised correlation in 2017 was mostly driven by company-specific rather than regionspecific
divergence (Chart 20).
12 Global Equity Volatility Insights | 20 June 2017
Chart 19: The SX7E 6m implied-realised correlation spread has been
high throughout 2017 and remains in the 88 th 5-year percentile
100%
80%
60%
40%
20%
0%
-20%
Jun-12
Dec-12
6m implied correlation
implied-realised spread
Jun-13
Dec-13
Jun-14
Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. Implied and realised
correlations are calculated using current weights.
Dec-14
Jun-15
6m realised correlation
Dec-15
55th percentile
8th percentile
88th percentile
Jun-16
Dec-16
Chart 20: The decline in SX7E 6M realised correlation appears to be
mainly due to company-specific rather than region-specific divergence
90%
70%
50%
30%
'12 '13 '14 '15 '16 '17
Spread (rhs)
Average inter-regional SX7E 6M realised correlation**
SX7E 6M realised correl*
50%
40%
30%
20%
10%
Source: BofA Merrill Lynch Global Research. Data: 16-Jan-12 to 16-Jun-17. *Calculated based on
current weights of French, German, Italian and Spanish banks with enough price history. **We
construct theoretical portfolios consisting of SX7E names from a given country (France, Germany,
Italy and Spain) and compute the average pairwise correlation of their daily returns
0%
Chart 21: ESTX50 3M put skew is near 5yr highs, in stark contrast to
SXEP (European Oil & Gas equity) put skew which is close to 5yr lows
6.5%
5.5%
4.5%
100th percentile
ESTX50 put 3M 90-100 (%fwd) put skew has re-steepened to
near 5 year highs following the flattening which ensued after
the first round of the French presidential elections (23-Apr). The
recent ESTX50 skew dynamics are in stark contrast to what has
been witnessed in the SXEP (European Oil & Gas equity), where
the 3M 90-100 volatility spread has been trending lower and is
currently near-flattest in 5 years.
3.5%
2.5%
2nd percentile
1.5%
Jun12 Jun13 Jun14 Jun15 Jun16 Jun17
SX5E 3M 90-100 put skew SXEP 3M 90-100 put skew
Source: BofA Merrill Lynch Global Research. Data: 16-Jun-12 to 16-Jun-17.
Global Equity Volatility Insights | 20 June 2017 13
Chart 22: May has typically been the month with the least amount of
ESTX50 realised volatility. This has also been true in 2017 thus far
12% '07 to '17
'87 to '97
10% '97 to '07
Overall trend ('87 to '17)
2017 YTD
8%
Average ESTX50 realised vol vs. May
6%
4%
2%
0%
-2%
Jan Feb Mar Apr May Jun
Jul Aug Sep Oct Nov Dec
The overall seasonality in ESTX50 realised volatility since 1987
(ESTX50 inception) has been one of relatively lower vol during
the summer months vs. autumn. In particular, May stands out as
the lowest vol month across most 10 year horizons, and this
also appears to be the case so far this year. We note that Apr-
17 vol stands out mainly due to the 4% ESTX50 move on the
Monday following the first round of the French presidential
elections.
Source: BofA Merrill Lynch Global Research. Data: 1-Jan-87 to 16-Jun-17.
Chart 23: ESTX50 1M 100-110 call skew is near-flattest since 2008
12%
SX5E 1M 100-110 (%fwd) call skew Current
10%
8%
ESTX50 short-dated (1M) 100-110 (%fwd) call skew has
flattened considerably since pre-French election (23-Apr) levels
and currently stands near 9 year+ lows. Consequently, limited
upside structures (e.g., call spreads) price attractively both from
an ATMf volatility and skew basis.
6%
4%
2%
0%
-2%
'08 '09 '10 '11 '12 '13 '14 '15 '16 '17
Source: BofA Merrill Lynch Global Research. Data: 2-Jan-08 to 16-Jun-17.
Table 4: Volatility measures of major equity indices in the EMEA region (data as of 16-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 13.4% 0.3% 2% 9.6% 2.0% 17% 3.4% -0.2% 99% 8.4% 0.9% 72% -1.2%
FTSE 10.0% -0.4% 1% 8.6% 1.1% 24% 3.6% 0.2% 100% 6.2% 0.2% 9% -0.8%
DAX 12.6% 0.3% 1% 12.7% 2.9% 29% 3.9% -0.2% 100% 8.5% 0.7% 67% -0.5%
CAC 13.3% 0.3% 3% 10.3% 2.0% 21% 2.6% -0.1% 100% 8.6% 1.2% 77% -0.7%
SMI 11.4% -0.1% 3% 12.2% 3.3% 44% 2.4% -0.1% 96% 6.5% 0.1% 27% 1.3%
RDXUSD 25.9% 0.9% 29% 16.2% -1.2% 17% 0.9% -0.4% 58% 5.2% 0.4% 27% -3.7%
TOP40 16.9% 1.3% 17% 10.6% 0.2% 15% 1.7% -0.5% 47% 8.0% 0.4% 36% -3.0%
ISE30 20.2% 0.4% 6% 10.1% -1.4% 5% 3.1% -0.3% 81% 6.9% 0.1% 74% -0.8%
Source: BofA Merrill Lynch Global Research
14 Global Equity Volatility Insights | 20 June 2017
European volatility: Sector snapshot
Table 5: Volatility measures and indicative option prices for major European sector indices (data as of 16-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) 10.7% -0.4% 2% 10.1% 0.6% -5 2% 16.4 2.1% -8 7% 4.8 -0.2% 5 80% 1.3%
SX6P (Utils) 12.2% 0.0% 4% 10.9% 0.8% 2 4% 12.8 2.4% 1 5% 4.2 -0.3% 0 95% -0.1%
SX7E (Banks) 22.7% 0.3% 2% 18.6% 1.9% 2 3% 5.4 3.6% 2 9% 2.8 -0.5% 0 52% -3.0%
SX7P (Banks) 18.5% -1.2% 2% 13.1% 1.5% -10 3% 6.8 3.2% -15 5% 3.2 -0.4% 10 86% -1.9%
SXAP (Auto) 16.7% -1.2% 1% 11.7% 1.3% -12 1% 7.8 3.0% -13 1% 3.3 -0.4% 6 68% -0.7%
SXDP (Health) 13.0% -0.8% 1% 8.7% 0.9% -9 2% 11.5 2.5% -12 3% 4.0 -0.3% 4 71% 0.0%
SXEP (Oil&Gas) 15.4% 0.0% 3% 11.8% 1.2% 0 3% 8.5 2.8% 2 2% 3.6 -0.2% -2 97% -1.3%
SXIP (Insur) 14.0% -0.9% 1% 9.4% 1.0% -10 1% 10.0 2.7% -11 1% 3.7 -0.4% 6 83% 1.0%
SXKP (Telecom) 15.4% 0.3% 3% 11.1% 1.1% 3 3% 8.8 2.8% 5 5% 3.6 -0.3% -3 83% -1.3%
SXNP (Indust) 16.3% 0.1% 13% 10.9% 1.2% 1 23% 8.1 2.8% 1 10% 3.6 0.0% 0 100% -0.3%
SXPP (Basic) 23.8% -0.7% 3% 17.8% 2.0% -7 3% 5.1 3.5% 0 4% 2.9 -0.3% -7 53% -4.8%
SXQP (Prsnl&HH Gds) 10.2% 0.0% 1% 7.2% 0.5% -1 2% 18.5 2.0% -1 1% 4.9 -0.3% 1 76% 0.3%
SXRP (Retail) 13.2% 0.4% 10% 12.8% 0.9% 8 10% 11.3 2.5% 14 10% 4.0 -0.1% -10 78% -3.3%
SXTP (Trvl&Lsre) 14.4% 0.0% 7% 11.6% 1.0% 1 7% 9.9 2.7% 0 8% 3.7 -0.3% 1 41% 0.5%
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 | 20 June 2017 15
Volatility in Asia
Long HSCEI-SPX volatility spread via corridor variance
Global synchronized monetary tightening is positive for EM vol
Emerging markets have been the biggest beneficiaries of the central bank-fueled
abundance of liquidity. However, we think the tide may be turning as last week, the Fed,
ECB, and BOE all delivered policy announcements with hawkish tones. How far they
really go to tighten policy when economic data is weakening still remains unknown.
However, we think the uncertainty surrounding tightening will be more positive for EM
volatility than for DM volatility.
Chinese banks: Rapid increase in leverage is a big concern
The HSCEI currently has a 70% weight in the financial sector. Recently, BofAML analyst
Winnie Wu turned very bearish on the sector as (1) leverage has rapidly increased—debt
to GDP rose by 18% in 2016 and may go above 300% by 2019, (2) shadow banking has
become too big, too complicated, and too levered to easily regulate—even at the
highest quality bank, China Merchants, off-balance sheet wealth management products
(WMP) have grown to 40% the size of on-balance sheet assets from just 18% two years
ago, and (3) excessive home price inflation—low and middle-income households are late
to the party and a correction in prices could have a systemic effect as property assets
have been used as collateral in WMPs.
SPX: The Fed is now “collaring” the market
Since the global financial crisis the Fed has been well known for providing a put option
by its willingness to step in during periods of market stress. However, post the Fed
meeting last week, it appears the central bank has decided to cap its monetary support
as some FOMC members seem worried that financial conditions are too loose.
Effectively, the market is now “collared” (more so for the SPX compared to EM) as the
downside is protected by the Fed put (though with a lower strike price) while the upside
is capped by log-jammed fiscal policy and positioning, where the risk of quant funds
selling record equity positions meets cashed-up investors still accustomed to buyingthe-dip.
The depressed implied China vs. US risks should reverse
With the steep drop in global risk premium, the HSCEI-SPX 18-month variance swap
spread has fallen back to the lower-end of its 5-year trading range. Since we believe the
global synchronized monetary tightening will impact HSCEI volatility more than SPX
volatility, we recommend owning HSCEI-SPX 70/110% corridor variance at 5 vol points,
a 3 vol point discount to vanilla variance spreads. Investors will be exposed to the
realized vol spread between HSCEI and SPX as long as HSCEI stays within 70-110% of
its initial level. Pricing of corridor variance is cheaper than vanilla variance as investors
can avoid paying for the rich HSCEI convexity below the 70% barrier. The trade has a
positive carry and benefits during China risk-off events.
Note that the potential HSCEI index enhancement will reduce the financial weightings in
HSCEI from 70% to 50% and lower realized volatility by 1.8 vol points. However, the
enhancement will be implemented in stages. It will probably start in Dec-17 at the
earliest and will not be fully implemented by the end of 2018, in our view.
Indicative pricing (As of 19-Jun-17)
Buy HSCEI-SPX Dec-18 70/110% corridor variance swap: 5 vol points
16 Global Equity Volatility Insights | 20 June 2017
Chart 24: The HSCEI-SPX Dec-18 (18-month) variance swap spread is
back to the lower-end of its 5-year trading range
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Jan-12
May-12
Sep-12
Jan-13
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Source: BofA Merrill Lynch Global Research Data as of 2-Jan-12 to 16-Jun-17
18-month constant maturity variance swap spread is used as a proxy of Dec18 variance swap spread
Sep-15
Jan-16
May-16
Dec18 HSCEI SPX Variance Spread
Sep-16
Jan-17
May-17
Chart 25: The long term HSCEI-SPX realized vol spread has been higher
than the current implied corridor variance spread (5%) 98% of the time
since 2007
30%
25%
20%
15%
10%
5%
0%
Jul-07
Feb-08
Sep-08
Apr-09
Nov-09
Jun-10
Jan-11
Aug-11
Mar-12
Oct-12
May-13
Dec-13
Jul-14
Feb-15
Sep-15
Apr-16
Nov-16
Jun-17
Source: BofA Merrill Lynch Global Research
HSCEI - SPX 18-month realized vol
Dec18 Variance Implied: 8%
Dec18 70/110% Corridor Variance Implied: 5%
Data as of 2-Jul-07 to 16-Jun-17
Chart 26: Historical payoff of buying HSCEI-SPX Dec-18 70/110%
corridor variance spread; higher payoffs during 2011-2012 and 2015
sell-offs
300,000
250,000
200,000
150,000
100,000
50,000
-
-50,000
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Table 6: The HSCEI-SPX Dec-18 70/110% corridor variance trade
has a positive carry with realized vol across most tenors higher
than the current implied corridor variance swap spread
HSCEI SPX Spread
1M realized vol 12.1% 4.6% 7.5%
3M realized vol 13.7% 6.8% 6.9%
6M realized vol 14.0% 6.8% 7.2%
12M realized vol 16.6% 9.7% 6.9%
18M realized vol 20.8% 11.99% 8.8%
HSCEI – SPX Dec18 70/110% corridor variance offer: 5.0%
Source: BofA Merrill Lynch Global Research
HSCEI-SPX Dec18 70/110% corridor historical payoff (10k
vega)
Source: BofA Merrill Lynch Global Research
Data as of 2-Jul-07 to 16-Jun-17
Global Equity Volatility Insights | 20 June 2017 17
Notable trends and dislocations (Asia)
Most regions in Asia reported modest declines last week, led by Hong Kong’s HSCEI,
which lost 2.0% week-over-week. Much of the decline came on Thursday following the
US Fed’s decision to hike rates 25bps. Also in China, the People’s Bank of China (PBOC)
injected 410bn yuan (about $60bn) into the financial system via reverse-repos, the
largest cash boost since January. The central bank said the funds are meant to ease
concern amid a seasonal funding squeeze. The biggest contributors to the index’s loss
were financials names, including China Life Insurance (2628 HK), which fell 5.7%, Ping
An Insurance Group Co of China Ltd (2318 HK), which dropped 3.7%, Bank of China Ltd
(3988 HK), which declined 1.8%, and China Merchants Bank Co Ltd (3968 HK), which fell
5.7%. We saw a similar decline from Hong Kong’s HSI index, which lost 1.6% percent
last week.
After the HSCEI and HSI, last week’s biggest losers were Korea’s KOSPI and India’s
NIFTY, which each returned -0.8% week-over-week. In Japan, the Nikkei fell 0.3%. On
Friday, the Bank of Japan (BoJ) left its monetary policy unchanged—it will continue to
control the yield curve via its negative benchmark rate and its asset purchasing program.
The final region to report a loss last week was Taiwan’s TWSE, which lost 0.4%.
On the other hand, the only region to see a gain last week was Australia, which saw its
ASX 200 benchmark increase 1.7% week-over-week. The biggest contributors to the
gain were Commonwealth Bank of Australia (CBA AU), which gained 3.4%, Westpac
Banking Corp (WBC AU), which increased 1.9%, and CSL Ltd (CSL AU), which added
2.9%.
10 day realized vol picked up in Asia last week, up 2.0 vol points to 9.6%
• Asian 3m ATM volatility declined on average 0.1 vol point to 12.3% last week, while
10 day realized vol increased on average 2.0 vol points to 9.6%. Notably, the HSI's
realized vol increased 5.4 vol points, the biggest increase in the region. On the
other hand, the NKY was the only index to see a decline in 10 day realized vol—it
dropped 4.3 vol points week-over-week to 7.2%.
• On average, term structures among Asian indices steepened by 0.2 vol points to
4.2% last week. The TWSE 12M-1M term structure steepened the most, increasing
1.0 vol point to 2.9%. On the other hand, Hong Kong’s HSI saw the only flattening
as its term structure flattened 0.1 vol point to 4.9%.
• Asian 3M 90-110% skews widened 0.5 vol points on average to 3.8%. Taiwan’s
TWSE widened the most, increasing 2.3 vol points to -0.2%.
Table 7: Volatility measures of major Asian indices (data as of 16-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% 0.2% 2.1% 10.2% 5.4% 20.6% 4.9% -0.1% 97.8% 3.3% 0.9% 41.4% -1.6%
HSCEI 15.0% -0.4% 0.0% 10.7% 4.8% 7.8% 5.4% 0.2% 98.1% 1.4% 0.5% 36.5% -2.0%
NKY 13.8% -0.2% 0.1% 7.2% -4.3% 1.8% 5.8% 0.5% 99.9% 5.8% 0.0% 73.9% -0.3%
KOSPI 200 12.2% 0.2% 19.7% 11.1% 1.1% 53.1% 4.0% 0.2% 77.0% 3.8% 0.3% 43.7% -0.8%
ASX 200 11.8% -0.2% 17.7% 15.7% 5.1% 77.1% 2.7% 0.0% 59.5% 6.4% -0.1% 22.5% 1.7%
NIFTY 10.7% 0.2% 2.2% 4.8% 1.0% 0.4% 4.0% 0.0% 76.1% 5.9% -0.1% 64.1% -0.8%
TWSE 10.5% -0.6% 7.2% 7.8% 1.0% 20.3% 2.9% 1.0% 71.2% -0.2% 2.3% 3.9% -0.4%
Source: BofA Merrill Lynch Global Research
18 Global Equity Volatility Insights | 20 June 2017
Chart 27: Both HSCEI and NKY term structures are near record steeps;
we favor calendar puts to hedge downside risks
15%
10%
5%
0%
-5%
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
NKY 3M-12M ATM Vol
Jan-13
Jul-13
Jan-14
Jul-14
Jan-15
Jul-15
Jan-16
Jul-16
HSCEI 3M-12M ATM Vol
Jan-17
Calendar puts are attractively priced given the steep term
structure
With the continuous low realized volatility environment, both
NKY and HSCEI 3-month minus 12-month term structures
steepened to -3.7 vol points, which are near multi-year lows.
As our strategists think the Fed now appears concerned about
surging asset prices, investors should consider downside
hedges. Calendar puts, i.e. buying short-dated ATM puts and
selling long-dated OTM puts, are attractively priced given the
steep term structure.
Currently, we still have an open trade on NKY calendar puts (buy
Jul-17 19,500 puts vs sell Dec-17 17,500 puts) to hedge
downside risks.
Source: BofA Merrill Lynch Global Research
Data as of 2-Jan-09 to 16-Jun-17
Chart 28: The Nikkei/Topix ratio and its volatility is capped with the
BoJ’s ongoing yield curve control
NKY / TPX Price Ratio
12.9
12.7
12.5
12.3
12.1
11.9
11.7
11.5
Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Mar-16
Aug-16
Jan-17
Jun-17
NKY/TPX Ratio
10Y JGB Yield
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
JGB 10-year yield (Inverted)
The BoJ’s ongoing yield curve control has capped the
Nikkei/Topix ratio and its volatility
Japanese government bond (JGB) yield has been on a downward
trend over the last few years and has negatively impacted bank
earnings. As the Topix has higher weightings in banks than the
Nikkei, the NKY/TPX ratio has been grinding higher.
However, the NKY/TPX ratio appears to have flattened out since
the BoJ’s commitment to maintain the 10-year JGB yield at
around 0% in September 2016. With global central banks
increasingly advocating tighter monetary policies, the market
may start to speculate BoJ’s exit strategy and this may reverse
NKY/TPX’s upward trend. With TPX vol trading below NKY vol,
buying TPX calls funded by NKY calls may perform well in such a
scenario.
Source: BofA Merrill Lynch Global Research
Data from 2-Jan-12 to 16-Jun-17
AS51 3M ATM IV over HSCEI is at its 4-year high
Table 4 lists Asian index pairs with the highest IV ratio vs their 4-year histories. For
instance, the ratio of AS51 3M ATM IV over HSCEI is at its 4-year high.
Global Equity Volatility Insights | 20 June 2017 19
Chart 29: The ratio of AS51 3M ATM IV over HSCEI is at its 4-yr high
(Daily data from 1-Oct-12 through 16-Jun-17)
Implied Vol
45%
40%
35%
30%
25%
20%
15%
10%
5%
Jan-13
AS51 3M ATM vol HSCEI ATM vol Vol ratio
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
0.90
0.80
0.70
0.60
0.50
0.40
Ratio
Table 8: Index pairs^ with the highest implied vol ratio vs their histories
(data as of 16-Jun-17)
Index A Index B A/B Implied
Ratio 4-yr
percentile
(Implied vol) (Implied Vol) Vol ratio
3M ATM AS51 (11.8%) HSCEI (15.0%) 0.79 100%
6M ATM KOSPI2 (13.2%) HSCEI (17.1%) 0.77 98%
12M ATM KOSPI2 (14.6%) NIFTY (14.0%) 1.04 98%
3M 25d-Put AS51 (13.8%) HSCEI (16.3%) 0.85 99%
6M 25d-Put KOSPI2 (14.4%) HSCEI (18.7%) 0.77 98%
12M 25d-Put KOSPI2 (16.0%) HSCEI (20.5%) 0.78 99%
3M 25d-Call AS51 (10.9%) HSCEI (15.0%) 0.73 99%
6M 25d-Call KOSPI2 (12.8%) NKY (14.4%) 0.89 98%
12M 25d-Call KOSPI2 (14.2%) NIFTY (12.2%) 1.16 98%
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
20 Global Equity Volatility Insights | 20 June 2017
Summary of Open Trades (19-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 9: Summary of open trades as of 19-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%
Expected
Trade Term
Dec-18 expiry
Rationale
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
Buy an SX5E Sep-17 95% put conditional on EUR 10Y CMS > 1.1% or <
0.3% in Mar-17
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
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
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
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 Insurance are the most leveraged sector
Buy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% Jun-17 expiry Banks and Insurance 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 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 inexpensive 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 inexpensive 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 inexpensive 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 out-of-favour and inexpensive biotech upside by levering depressed vol & skew
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 a potential China tech bubble; Tencent potentially volatile 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
30-May-17 1.17%
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
Global Equity Volatility Insights | 20 June 2017 21
Table 9: Summary of open trades as of 19-Jun-17
Trade Description
Buy 6m ATM calls on FB, AMZN, NFLX and GOOGL
Open
Date
Open
Level
6.9%
(FB),
7.2%
(AMZN),
30-May-17
9.4%
(NFLX),
6.2%
(GOOGL)
Expected
Trade Term
6m
Rationale
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
Buy 14-Sep-17 best-of 95% put on NKY/KOSPI2/HSI 05-Jun-17 0.80% Sep-17 expiry Buy best-of puts to hedge a reversal in rally with the low vol and correlation environment
Buy SPX Top50 volatility dispersion 05-Jun-17 16.6% Jun-18 expiry Position for a potential bubble in Tech
Buy XLF 24 call, sell QQQ 139 call 12-Jun-17 0.01% Jul-17 expiry Rotate out of Growth into Value
Buy NKY-KOSPI2 Dec-17 90/110 strangle spreads 12-Jun-17 3.50% Dec-17 expiry We think the technically depressed NKY-KOSPI2 volatility spread will normalize
Buy NKY Sep17 19000-17500 put spread 12-Jun-17 0.93% Sep-17 expiry NKY put spread may offer even better value in hedging against a "mini TARP moment"
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”.
22 Global Equity Volatility Insights | 20 June 2017
Summary of Closed Trades (19-Jun-17)
Table 10: Summary of closed trades as of 19-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 | 20 June 2017 23
Table 10: Summary of closed trades as of 19-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
24 Global Equity Volatility Insights | 20 June 2017
Table 10: Summary of closed trades as of 19-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
Buy NKY Jun17 110% Call 02-Dec-16 1.83% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money
Buy TPINSU Jun17 110-125% Call Spread 02-Dec-16 3.30% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money
Buy TPNBNK Jun17 110-125% Call Spread 02-Dec-16 3.20% 0.00% 9-Jun-17 Closing the trade on expiry; Japan market rallied but options remain out of the money
Buy NKY Jun17-Jun18 18,500 strike FVA 02-Dec-16 21.5% 19.1% 9-Jun-17 Closing the trade on Jun17 expiry; Global volatility collapsed in 1H2017
Buy an EWZ Jun-17 40 call conditional on SPX<2200 at
expiry
24-Oct-16 1.70% 0% 19-Jun-17 Recent political turmoil in Brazil surrounding Temer's presidency caused a slide in the Brazilian
equity market and the BRL
Buy SPX Jun17 95% put contingent on US 5Y CMS > 2.15 5-Dec-16 1.04% 0% 19-Jun-17 In Dec-16, we recommended remaining long equities overlayed with cheap hedges. The hedge
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%
expires out of the money, while SPX has returned 10.2% for the period
5-Dec-16 2.10% -12.90% 19-Jun-17 Following the US election and the initial move in rates, XLF rallied and subsequently stalled. In the
same period, the defensive sectors played the catch-up trade
5-Dec-16 2.30% 0% 19-Jun-17 Concerns over US tax reform implementation caused small-caps to underperform relative to other
equity markets, including EM
Buy QQQ Jun17 132 call , sell XLF Jun17 25 call 20-Mar-17 0.57% 4.73% 19-Jun-17 The trade captured the recent Tech sector outperformance in a period when Financials lagged
driven by lower rates
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 | 20 June 2017 25
Volatility in Numbers (16-Jun-17)
Table 11: 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 9.8% 13.4% 10.0% 12.6% 13.8% 12.4% 12.2% 14.0% 16.8% 13.6% 16.6% 17.2% 15.8% 14.6%
%tile (2yr) 1.2% 1.6% 0.6% 0.8% 0.4% 4.1% 19.9% 7.7% 5.6% 9.5% 5.5% 1.8% 6.3% 24.9%
1Week Change -0.2% 0.3% -0.4% 0.3% -0.2% 0.1% 0.3% 0.1% 0.1% -0.1% 0.1% -0.4% 0.0% 0.1%
1Mth Change -0.2% 0.0% 0.0% -0.4% -0.5% -0.3% -0.2% 0.1% 0.3% 0.6% 0.1% 0.2% 0.2% 0.7%
Realised 7.0% 11.4% 9.6% 10.7% 12.2% 10.2% 10.7% 9.5% 13.3% 12.2% 15.1% 19.6% 13.5% 11.4%
%tile (2yr) 11.5% 15.5% 15.6% 9.4% 0.6% 0.8% 21.1% 0.0% 0.0% 0.0% 0.0% 10.8% 1.4% 20.7%
1Week Change -0.2% 0.2% 0.2% 0.4% -0.3% 0.1% -0.1% -0.1% -3.2% -0.3% -0.4% -0.2% 0.1% -0.1%
1Mth Change 0.4% -0.1% 0.1% 0.1% -0.2% -0.5% 0.1% 0.0% -3.8% -0.7% -1.0% -0.4% -0.5% 0.0%
Imp-real spread 2.7% 2.0% 0.4% 1.9% 1.6% 2.3% 1.5% 4.5% 3.5% 1.4% 1.5% -2.3% 2.3% 3.1%
Spread %tile (2yr) 57.9% 55.7% 45.1% 57.2% 67.8% 71.3% 58.6% 91.5% 100.0% 85.2% 99.2% 61.6% 89.2% 70.8%
1Week Change -0.1% 0.1% -0.5% -0.2% 0.0% 0.1% 0.4% 0.1% 3.3% 0.2% 0.4% -0.2% -0.1% 0.2%
1Mth Change -0.6% 0.1% -0.1% -0.5% -0.2% 0.2% -0.2% 0.2% 4.1% 1.3% 1.2% 0.6% 0.7% 0.7%
90-110 skew 8.5% 8.4% 6.2% 8.5% 5.8% 3.3% 3.8%
%tile (2yr) 16.1% 71.8% 8.8% 66.7% 47.9% 17.8% 14.2%
1Week Change 0.2% 0.9% 0.2% 0.7% 0.0% 0.9% 0.8%
1Mth Change 0.5% 2.4% 1.2% 1.6% 0.2% 0.9% 0.9%
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 3.2% 9.4% 8.3% 12.1% 7.1% 9.9% 10.6% 4.3% 3.4% 3.6% 3.9% 3.5% 3.4% 2.4%
%tile (2yr) 1.0% 16.3% 21.7% 26.3% 0.8% 15.5% 46.7% 99.8% 98.9% 99.6% 99.6% 98.9% 96.9% 79.5%
1Week Change -1.5% 2.1% 1.2% 2.5% -4.1% 4.6% 0.9% 0.3% -0.2% 0.2% -0.2% -0.2% -0.1% -0.2%
1Mth Change -0.4% 0.9% 0.4% 5.2% -5.8% 0.1% -6.2% 0.3% 0.3% 0.6% 0.5% 0.7% 0.4% 0.9%
Cash index
Current Level 2,433.15 3,543.88 7,463.54 12,752.73 19,943.26 25,626.49 306.79
1Wk Change 0.06% -1.18% -0.85% -0.49% -0.35% -1.55% -0.84%
1Mth Change 1.35% -2.69% -0.78% -0.40% 0.12% 1.15% 2.38%
Source: BofA Merrill Lynch Global Research
Table 12: 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 15.6% 22.9% 25.9% 16.9% 19.2% 24.3% 26.7% 18.5%
%tile (2yr) 5.0% 31.7% 28.7% 15.6% 8.9% 39.2% 26.7% 9.2%
1Wk Change 0.5% -1.7% 0.9% 1.2% 0.2% -0.2% 0.5% 0.8%
1Mth Change 0.5% 1.8% 2.6% 1.9% 1.4% 2.0% 1.4% 0.5%
Realised 11.8% 25.3% 20.5% 11.0% 17.6% 22.5% 20.4% 14.9%
%tile (2yr) 0.2% 58.8% 20.8% 3.2% 8.5% 5.7% 0.0% 2.8%
1Wk Change -1.2% -0.6% -1.1% 0.3% -0.2% -0.4% -0.4% 0.1%
1Mth Change -1.2% 6.6% 0.0% -0.6% -0.2% 1.5% -0.9% -0.2%
Imp-real spread 3.8% -2.4% 5.4% 5.8% 1.6% 1.9% 6.3% 3.6%
Spread %tile (2yr) 85.5% 11.7% 71.7% 95.0% 65.5% 74.9% 99.0% 74.9%
1Wk Change 1.8% -1.1% 2.0% 1.0% 0.5% 0.1% 1.0% 0.7%
1Mth Change 1.7% -4.8% 2.7% 2.5% 1.6% 0.5% 2.3% 0.7%
90-110 skew 7.0% 5.9% 5.2% 8.0%
%tile (2yr) 32.8% 68.4% 26.2% 35.4%
1Wk Change 0.7% 0.8% 0.4% 0.4%
1Mth Change 0.9% 0.4% 0.6% 1.3%
10-day realised
12M - 3M term vol spread
EEM US IBOV RDXUSD TOP40 EEM US IBOV RDXUSD TOP40
Current Level 8.1% 8.8% 17.0% 12.2% 3.6% 1.4% 0.9% 1.7%
%tile (2yr) 4.0% 0.2% 17.8% 26.3% 97.5% 80.5% 57.7% 46.2%
1Wk Change -0.5% -4.3% -2.2% 0.8% -0.3% 1.5% -0.4% -0.5%
1Mth Change -3.9% -8.1% -2.7% 5.3% 1.0% 0.2% -1.2% -1.4%
Cash index
Current Level 41.22 61,626.41 1,136.99 44,512.15
1Wk Change -0.94% -0.94% -3.70% -2.97%
1Mth Change -1.10% -10.28% -11.99% -6.15%
Source: BofA Merrill Lynch Global Research
26 Global Equity Volatility Insights | 20 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
Analyst Certification
I, Benjamin Bowler, hereby certify that the views expressed in this research report
accurately reflect my personal views about the subject securities and issuers. I also
certify that no part of my 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 Adviser to Glencore PLC in connection
with its proposed acquisition in consortium with Qatar Investment Authority, of a 19.5%
stake on Rosneft PJSC, which was announced 10th December 2016.
BofA Merrill Lynch is currently acting as financial adviser to Intesa Sanpaolo Group,
Banco Santander SA, Warburg Pincus LLC and General Atlantic LLC in connection
with the proposed sale of their entire stake in Allfunds Bank to Hellman & Friedman and
GIC, which was announced on 7 March 2017.
Global Equity Volatility Insights | 20 June 2017 27
Disclosures
Important Disclosures
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
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28 Global Equity Volatility Insights | 20 June 2017
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Global Equity Volatility Insights | 20 June 2017 29
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.
30 Global Equity Volatility Insights | 20 June 2017