EFTA01787340

From: Ens, Amanda Sent: Friday, December 9, 2016 3:46 PM To: jeffrey E.; Rich Kahn Subject: RE: Financials: buy XLF call spreads We continue to see further upside in financials. * Erika Najarian, BAML financials=research analyst, just returned from a marketing trip. Bottom line: North American investors are very bullish the banks (lo=g only AND hedge funds AND macro funds), but then conclude "I don:=17;t own enough". Note that high touch flows have slowed down =ignificantly since Thanksgiving and where the buying has been concentrated in XLF (every client sector we have has been a better buyer o= XLF). • Client focus: 1) Regulation: Excitement, with the base case that it's =ot getting worse. 2) Sentiment on rates: Cautiously bullish 3) Sentiment on growth: Also bullish 4) Sentiment on corporate tax rate cuts: buyside more bullish =han sellside. In 1986, bank stocks exploded upward (outperforming the S&am=;P) after Reagan's tax reform bill passed the Senate; and 2) in 2003, the last time we saw personal tax cuts, loan growth industry w=de accelerated in 2003 and 2004. • Biggest Pushback on owning sect=r at current levels: Too far too fast: BKX +18.00% post election= Valuation coming into question and Q4 has typically been a seasonally weak qtr. Bulls defend valuation on '18ests with potential upside to=2018 EPS from —25-40% and stocks still cheap vs. discretionary. • Price action and sentiment keep= us constructive, we like the long and would expect US financials to=benefit from any beta chase into year end. How to play it? We still like "appearing" call spreads =n XLF o Buy a 6 month 105% call with a =hort 110% call that knock in if XLF trades above 115% during the lif= of the trade for 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 triggere=: 5.6x (9.9%/1.75%) — you have upside up to 114.9% EFTA_R1_00110628 EFTA01787340 Regards, Amanda Amanda Ens=/span> Director I Global Equities Bank of America Merrill =ynch Merrill Lynch, Pierce, F=nner & Smith Incorporated One Bryan= Park 5th Floor I New York, NY 10036 Phone <=p> From: Ens, Ama=da Sent: Tuesday, November 22, 2016 2:15 PM To: 'jeffrey E.'; Rich Kahn Subject: Financials: buy XLF call spreads Underweight positioning, buybacks resuming, positive momentum and st=ong fundamentals all indicate that there is still further upside potential in financials (more details below). Our financials sector=specialist thinks XLF could have another 20-25% upside given the many leve=s to the Trump Trade: less regulation, higher interest rates, higher vol, =conomic growth, loan growth, etc. The asset sensitive regional banks are more of a pure play on a rates move=but we view the larger cap banks as having multi-pronged upside given the =forementioned points. That said, given the velocity and magnitude of the recent move and u=certainty around the impact and timing of Trump's policies, we believe options offer better risk-reward than being outright long finan=ials stocks here. With flat call skew, "appearing" call spread= 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% 2 EFTA_R1_00110629 EFTA01787341 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% </=pan> Post Election Flow Skews - Buyers of Health Care (via ETFs) and F=nancials (mainly ETFs) US Buyback Flows Source: Kensho Technologies</=pan> The Flow Show <http://rsch.baml.com/r?q=lOkdhk4ka=fvRbmcQWmwEQ&e=dg.americasequity_derivativessales%40baml.com&h=3 0jyUCKg> , Michael Ha=tnett, 11/18. Violent rotation: record equity ETF inflow, record financials inflow, biggest bond outflow in 3.5 yrs, record EM debt =utflow. Regards, Amanda Amanda=Ens Direct=r I Global Equities Bank o= America Merrill Lynch Merril= Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park I Sth Floor I New York, NY 10036 3 EFTA_R1_00110630 EFTA01787342 This message, and any attachments, is for the intended recipient(s) onl=, may contain information that is privileged, confidential and/or propriet=ry and subject to important terms and conditions available at http://www.b=nkofamerica.com/emaildisclaimer. If you are not the intended recipient, =lease delete this message. 4 EFTA_R1_00110631 EFTA01787343