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Global Equity Volatility Insights
Why S&P vol dispersion may be the best way to trade a bubble in Tech

Bank of America Merrill Lynch
06 June 2017

US
How to detect and position for a potential Tech Bubble
Our investment strategists recently warned against the risk of an overshoot in US Tech, as data on valuations, relative performance, and inflows invoke echoes of the late '90s. However, rising Tech vol alongside rising Tech stock prices – a classic sign of an asset bubble – has yet to materialize, suggesting still early stages of bubble formation. Derivatives can be a key tool for trading bubbles, allowing investors to capture asset price upside while mitigating reversal risk. To this end, we like stock replacing FANG positions or overlaying Tech exposure with Nasdaq 100 (NDX) put spreads. Long volatility dispersion strategies are particularly well-suited for trading asset bubbles, in our view, as they can profit from both the inflation and deflation of a bubble without needing to time the top. Specifically, we like SPX 12M Top50 dispersion to position for a potential Tech Bubble as (i) the Top50 basket is dominated by Tech stocks, hence would benefit from any rise in their vol from currently low levels; (ii) the trade would benefit from any downward pressure on broad-market correlations as Tech stocks decouple from other large caps; and (iii) the late '90s Tech Bubble generated the most sustained period of elevated S&P vol dispersion in history.

Europe
DTE Sep17 collars can hedge DTE-TMUS merger risk; value in Enel bullish riskies
DTE GY has run too fast, too quick: investors who own stock should consider hedging a pullback using a Sep17 collar (+17put/-18 call for 46bps) to hedge losses greater than 2.9% while retaining upside to 18 (stock's ~15yr high is 18.05). Extending our EU equity vs credit theme to single names, we find Enel 3m bullish risk reversals screen attractive as Enel's projected 12m div yield is high versus Enel CDS (suggesting value in owning equity vs credit) and the price of 3M bullish risk reversals is low (versus other names) as well as versus history (2nd 5y percentile).

Asia
Buy best-of puts to cheaply hedge a reversal in the melt-up rally
While still high central bank liquidity may continue to push markets higher, heavy equity and option positioning suggests the risk of a market reversal. To minimize the cost of hedges and take advantage of the recent decline in volatility and correlation, we suggest owning 14-Sep-2017 95% strike best-of puts on KOSPI2/HSI/NKY at 0.8%, a 45% discount to average vanilla puts.

[Vertical text on left margin]: Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ons@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.
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Refer to important disclosures on page 32 to 36. Analyst Certification on page 29. Price Objective Basis/Risk on page 29.
Timestamp: 06 June 2017 01:43AM EDT
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Equity Derivatives
Global

BofA Analytics
- DATA DRIVEN -

Global Equity Derivatives Rsch
MLPF&S

Nitin Saksena
Equity-Linked Analyst
MLPF&S

Stefano Pascale
Equity-Linked Analyst
MLPF&S

Benjamin Bowler
Equity-Linked Analyst
MLPF&S
benjamin.bowler@baml.com

William Chan, CFA >>
Equity-Linked Analyst
Merrill Lynch (Hong Kong)

Michael Youngworth
Equity-Linked Analyst
MLPF&S

Clovis Couasnon >>
Equity-Linked Analyst
MLI (UK)

Jason Galazidis >>
Equity-Linked Analyst
MLI (UK)

Abhinandan Deb >>
Equity-Linked Analyst
MLI (UK)

Nikolay Angeloff
Equity-Linked Analyst
MLPF&S

See Team Page for List of Analysts

Table 1: 3M volatility (weekly changes)
Implied Realized
S&P500 9.5 (-0.1) 7.3 (-0.4)
ESTX50 13.0 (-0.4) 11.1 (-0.6)
FTSE 10.6 (0.4) 9.2 (-0.5)
DAX 12.2 (-0.7) 9.9 (-0.7)
NKY 14.2 (-0.2) 12.5 (0.1)
HSI 12.4 (0.3) 10.1 (-0.2)
KOSPI 12.8 (-0.3) 10.6 (0.0)
EEM US 15.4 (-0.1) 13.2 (-0.8)
TOP40 15.1 (1.0) 10.9 (0.0)
RDX 24.7 (1.2) 21.9 (0.0)
IBOV 25.3 (0.5) 26.4 (-0.2)
ISE30 19.6 (-0.2) 14.0 (-0.4)
Source: BofA Merrill Lynch Global Research

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