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2.04 MB
Extraction Summary
2
People
4
Organizations
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Locations
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Events
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Relationships
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Quotes
Document Information
Type:
Financial research report
File Size:
2.04 MB
Summary
This document is a page from a 'Global Equity Volatility Insights' report produced by Bank of America Merrill Lynch on August 9, 2016. It outlines a financial trading strategy to capitalize on a seasonal dip in oil prices by selling USO puts to fund SXEP calls. The document contains technical financial analysis, charts regarding sector performance, and carries a House Oversight Bates stamp, indicating it was part of a document production for a congressional investigation.
People (2)
| Name | Role | Context |
|---|---|---|
| Commodity Strategists | Analysts |
Mentioned as source of the 'buy the dip' opportunity recommendation.
|
| Credit Strategists | Analysts |
Mentioned regarding CSPP bond purchases.
|
Organizations (4)
| Name | Type | Context |
|---|---|---|
| Bank of America Merrill Lynch |
Logo present on document footer; source of research.
|
|
| BoE |
Bank of England; mentioned regarding easing.
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|
| ECB |
European Central Bank; implied by reference to CSPP (Corporate Sector Purchase Programme).
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|
| House Oversight Committee |
Implied by Bates stamp 'HOUSE_OVERSIGHT_025987'.
|
Locations (1)
| Location | Context |
|---|---|
|
Focus of the volatility report and SXEP equity.
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Key Quotes (3)
"The seasonal sell-off in oil presents a 'buy the dip' opportunity according to our commodity strategists, who expect prices to rebound to $55/bbl by year end."Source
HOUSE_OVERSIGHT_025987.jpg
Quote #1
"Sell 1x USO 3M 25d (~88% strike) puts to fully fund 2.1x SXEP (Oil & Gas equity) 25d (~106% strike) calls"Source
HOUSE_OVERSIGHT_025987.jpg
Quote #2
"CSPP has purchased an outsized proportion of Energy corporate bonds and this has yet to feed through to equities"Source
HOUSE_OVERSIGHT_025987.jpg
Quote #3
Full Extracted Text
Complete text extracted from the document (2,851 characters)
Volatility in Europe
Buy the seasonal oil dip via bullish X-market risk reversals
Buy the seasonal oil dip via bullish X-market risk reversals
Levered X-market risk reversal: Sell 1x USO 3M 25d (~88% strike) puts to fully fund 2.1x SXEP (Oil & Gas equity) 25d (~106% strike) calls (indic.)
Alternative (unlevered) implementation: Sell USO 25d puts to fund fully fund closer to the money SXEP calls
Alternative (unlevered) implementation: Sell USO 25d puts to fund fully fund closer to the money SXEP calls
The seasonal sell-off in oil presents a 'buy the dip' opportunity according to our commodity strategists, who expect prices to rebound to $55/bbl by year end. In fact current levels of ~$40 are close to the summer floor ($39) they had previously suggested.
BofAML strategists have turned bullish Oil & Gas equities given more CB (BoE) easing, attractive div yields and exposure to the EM recovery narrative. Moreover, Oil & Gas has been the worst performing Stoxx 600 sector over the last 1M, suggesting it has ample scope to rally if it is to catch up to the broader equity market (Chart 15).
USO (Oil ETF) puts are rich vs. SXEP (European Oil & Gas equity) calls: The number of long SXEP 25d calls that can be fully funded by selling 1 short USO 25d put is near historical highs (90th percentile since '08, Chart 16). In contrast, both SXEP and USO risk reversals are only modestly more attractive than their historical medians.
SXEP calls would have offered better value than USO calls at current levels in terms of average historical payoffs as well as the frequency of positive returns (when sized for the same upfront cost, Chart 17). Note that an unlevered implementation of the trade allows for early participation in any potential SXEP rally (as the SXEP call strike is near the money) while providing a ~12% buffer before incurring losses (at expiry) on the short USO leg (Chart 18).
CSPP has purchased an outsized proportion of Energy corporate bonds and this has yet to feed through to equities according to our credit strategists (Chart 19): The number of Energy corporate bonds bought by the ECB is approx. 45% of the total eligible amount – the 3rd highest proportion across all European sectors.
Potential USO losses may be dampened if the recent $/Oil correlation persists: Since mid-2015 oil drawdowns have largely coincided with USD weakening (Chart 20).
Chart 15: SXEP (Oil & Gas equity) has been the worst performing Stoxx 600 sector over the last 1M
[Bar chart showing 1M Sector Performance]
Source: BofA Merrill Lynch Global Research. Data from 7-Jul-16 to 5-Aug-16.
[Bar chart showing 1M Sector Performance]
Source: BofA Merrill Lynch Global Research. Data from 7-Jul-16 to 5-Aug-16.
Chart 16: The leverage provided by the X-market risk reversal (long SXEP call / short USO put) is attractive from a historical standpoint
[Bar chart showing SXEP call vs. USO put ratios]
Source: BofA Merrill Lynch Global Research. Data as of 5-Aug-16, using indicative mid prices. *Percentiles since Jan-08.
[Bar chart showing SXEP call vs. USO put ratios]
Source: BofA Merrill Lynch Global Research. Data as of 5-Aug-16, using indicative mid prices. *Percentiles since Jan-08.
10 Global Equity Volatility Insights | 09 August 2016
Bank of America Merrill Lynch
HOUSE_OVERSIGHT_025987
Bank of America Merrill Lynch
HOUSE_OVERSIGHT_025987
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