From: Daniel Sabba .a To: -Jeffrey E." cijeevacationgmail.com> CC: Paul Morris Vahe Slcpanian - Subject: RE: short crude vol strategy - follow-up analysis Date: Thu, 05 Feb 2015 22:49:54 +0000 Inline-Images: image(X11.png: image002.png: image003.png: image004.png: image005.png Richard Kahn Ctassificatm: Public Jeffrey, Our structuring desk did further analysis on the transaction - please see below. As discussed, let's speak further tomorrow morning. Below numbers are still as of E00 yesterday: here is the same table as earlier and additional explanation regarding what it means. Vol sulks *Mks 0s Roaleted Cl s • - Seated kaalNa Canoe Ohs 604 334.a-1S 79% -1914 SA% WS 434 134..45 77% .33% 56% MKS 424 144**-1S 73% -31% 44 Let's focus on CL35 (April15) and similar applies to the other nodes. Vol strike was 43% and realized vol has been 77%. If the index had exposure only to this contract and not at all to the other contracts, and if realized vol up to expiry of this contract were also 77% then the implied-realized diff is 43%-77% = -34%. That is massive. This does not mean that you would lose 34% of the notional, but at least illustrates that you should expect the loss to be big. How much you actually lose is a daily path dependent calculation and cannot be summarized in a few sentences. If realized vol was EXACTLY same as implied vol also, the gain/loss would not be zero, but is a path dependent function. Back of the envelope, with a 34% implied-realized difference, one can expect a loss of 17% because the index has a vega of, on overage 0.5% of index notional; but at any given point in time even with vols unchanged, the vega could be anywhere between 0.33% and 0.67% (this is in steady state with vols unchanged, with changing vols, it could be a wider range). As we know, the strategy of the index is to sell 3 straddles (collecting premium); and delta hedges daily at the close (in other words, trades the gamma). One would ex