HOUSE OVERSIGHT 011281 Regards, Amanda Amanda Ens Director Global Equities Bank of America Merrill Lynch Merrill Lynch, Pierce, Fenner & Smith Incorporated One Bryant Park 15th Floor New York, NY 10036 Phone Mobile From: Ens, Amanda 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 strong 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 levers to the Trump Trade: less regulation, higher interest rates, higher vol, economic 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 aforementioned points. That said, given the velocity and magnitude of the recent move and uncertainty around the impact and timing of Trump's policies, we believe options offer better risk-reward than being outright long financials stocks here. With flat call 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). We are seeing a seasonal increase in buybacks as we come out of the low seasonal month of the year (October) and should see increased buyback executions until year-end, another source of