File 011280
Email Chain: Financial Investment Strategy for XLF Call Spreads (File 011280)
Email correspondence from December 2016 between Amanda Ens at Bank of America Merrill Lynch and Jeffrey Epstein discussing investment strategy recommendations for financial sector call spreads on the XLF ETF.
Summary
Amanda Ens, Director of Global Equities at BAML, sends investment analysis and recommendations to Jeffrey Epstein and Richard Kahn regarding call spread trading strategies on the XLF (financial sector ETF). The emails detail bullish sentiment on financials post-election, cite research from BAML analysts including Erika Najarian on bank valuations and regulatory outlook, and propose specific structured call spread trades with detailed payoff scenarios. The correspondence includes technical analysis of market positioning, buyback flows, and references to BAML's Future of Financials conference insights.
From: Ens, Amanda_____________________________Sent: 12/9/2016 4:03:45 PMTo: jeffrey E. [jeeyacation@gmail.com]; Richard Kah ___________________________________Subject: RE: Financials: buy XLF call spreadsAttachments: image001.pngImportance: HighThank you Jeffrey. Notional is $14,285,000. I'll be back with final trade details.From: Jeffrey E. [mailto:jeevacation@gmail.com]Sent: Friday, December 09, 2016 10:56 AMTo: Ens, Amanda; Richard KahnSubject: Re: Financials: buy XLF call spreadslets try, 250k premiumOn Fri, Dec 9, 2016 at 11:46 AM, Ens, Amanda wrote:We continue to see further upside in financials.• Erika Najarian, BAML financials research analyst, just returned from a marketing trip. Bottom line: North Americaninvestors are very bullish the banks (long only AND hedge funds AND macro funds), but then conclude "I don't ownenough". Note that high touch flows have slowed down significantly since Thanksgiving and where the buying has beenconcentrated in XLF (every client sector we have has been a better buyer of XLF).• Client focus:1) Regulation: Excitement, with the base case that it's not getting worse.2) Sentiment on rates: Cautiously bullish3) Sentiment on growth: Also bullish4) Sentiment on corporate tax rate cuts: buyside more bullish than sellside. In 1986, bank stocks exploded upward(outperforming the S&P) after Reagan's tax reform bill passed the Senate; and 2) in 2003, the last time we saw personaltax cuts, loan growth industry wide accelerated in 2003 and 2004.• Biggest Pushback on owning sector at current levels: Too far too fast: BKX +18.00% post election: Valuation cominginto question and 04 has typically been a seasonally weak qtr. Bulls defend valuation on '18ests with potential upside to2018 [PS from —25-40% and stocks still cheap vs. discretionary.• Price action and sentiment keeps us constructive, we like the long and would expect US financials to benefit fromany beta chase into year end.• How to play it? We still like "appearing" call spreads on XLFo Buy a 6 month 105% call with a short 110% call that knock in if XLF trades above 115% during the life of the tradefor 1.75% premium cost• Gross max payoff if knock-in is triggered: 2.8x (5.0%/1.75%)• Gross max payoff if knock-in is not triggered: 5.6x (9.9%/1.75%) — you have upside up to 114.9%HOUSE OVERSIGHT 011280Regards,AmandaAmanda EnsDirector Global EquitiesBank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park 15th Floor New York, NY 10036Phone MobileFrom: Ens, AmandaSent: Tuesday, November 22, 2016 2:15 PMTo: 'jeffrey E.'; Rich KahnSubject: Financials: buy XLF call spreadsUnderweight positioning, buybacks resuming, positive momentum and strong fundamentals all indicate that there is stillfurther upside potential in financials (more details below). Our financials sector specialist thinks XLF could have another20-25% upside given the many levers to the Trump Trade: less regulation, higher interest rates, higher vol, economicgrowth, loan growth, etc. The asset sensitive regional banks are more of a pure play on a rates move but we view thelarger cap banks as having multi-pronged upside given the aforementioned points.That said, given the velocity and magnitude of the recent move and uncertainty around the impact and timing ofTrump's policies, we believe options offer better risk-reward than being outright long financials stocks here. With flatcall skew, "appearing" call spreads with upside knock-ins price well.Buy a 1 year XLF call spread for 2.6% premium• Buy a 110% call• Sell a 117.5% call with an at-expiry knock-in at 125% (call is not active unless XLF is 125% or higher at expiry)o Total premium is 2.6%o Gross max payoff if knock-in is triggered: 2.9x (7.5%/2.6%)o Gross max payoff if knock-in is not triggered: 5.7x (14.9%/2.6%) — you have upside up to 124.9%Post Election Flow Skews - Buyers of Health Care (via ETFs) and Financials (mainly ETFs)• US Buyback Flows• Cons Disc, Technology and Financials are the largest 3 sectors for US buybacks (over 70% of execution). Weare seeing a seasonal increase in buybacks as we come out of the low seasonal month of the year (October) and shouldsee increased buyback executions until year-end, another source of upside for the Cons Disc, Technology and Financialssectors.Global Positioning, Nigel Tupper, 11/14. Large long-only funds are more underweight Financials than any othersector and are UW this sector in all regions.Future of Financials conference hosted 90 public and private companies at our Future of Financials conference. We areraising our price objectives across most of our names. Three primary reasons why we think there is upside remainingHOUSE OVERSIGHT 011281after the recent rally: 1) an improved outlook on both activity levels and interest rates, driving revenue upside; 2)potentially lower regulatory burden, particularly as new supervisory leadership can come with the new administration;and 3) relatively lighter positioning in US financials vs. other sectors. (Erika Najarian)Trades Gaining Momentum: Finance-Related Assets vs. S&P 500In the period since the US presidential election, the three top-performing S&P sectors and industry groups have all beenfinance-related (Banks, Financials, Diversified Financials)Source: Kensho TechnologiesThe Flow Show, Michael Hartnett, 11/18. Violent rotation: record equity ETF inflow, record financials inflow, biggestbond outflow in 3.5 yrs, record EM debt outflow.Regards,AmandaAmanda EnsDirector 1 Global EquitiesBank of America Merrill LynchMerrill Lynch, Pierce, Fenner & Smith IncorporatedOne Bryant Park 15th Floor New York, NY 10036Phone: Mobile:This message, and any attachments, is for the intended recipient(s) only, may contain information that isprivileged, confidential and/or proprietary and subject to important terms and conditions available atHOUSE OVERSIGHT 011282http://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete thismessage.please noteThe information contained in this communication isconfidential, may be attorney-client privileged, mayconstitute inside information, and is intended only forthe use of the addressee. It is the property ofJEEUnauthorized use, disclosure or copying of thiscommunication or any part thereof is strictly prohibitedand may be unlawful. If you have received thiscommunication in error, please notify us immediately byreturn e-mail or by e-mail to jeevacation@gmail.com, anddestroy this communication and all copies thereof,including all attachments. copyright -all rights reservedThis message, and any attachments, is for the intended recipient(s) only, may contain information that isprivileged, confidential and/or proprietary and subject to important terms and conditions available athttp://www.bankofamerica.com/emaildisclaimer. If you are not the intended recipient, please delete thismessage.HOUSE OVERSIGHT 011283